We hear today of the upcoming row between those puritan Europeans – slash the deficits – and those cavalier Americans – stoke the recovery. Mr Spend and Borrow himself, Mr Obama, has warned Europe not to overdo the cuts. So who is right?
They are both right. As we have seen in the Euro zone, failure to control deficits in countries like Greece, Ireland, Portugal and Spain leads to higher interest rates and market forces pushing the states to even bigger cuts. High deficits and surging debt levels undermine confidence and come to impede recovery. No highly borrowing state with the possible exception of the US can ignore the need to rein in their borrowing and maintain or regain the confidence of markets. The US will get away with more borrowing for longer because the dollar remains the world’s reserve currency and China still has some appetite for it.Even the US one day has to repay the debts and put its budget into shape.
Just cutting state spending and borrowing will not of itself generate recovery. Countries emerging slowly and fitfully from a deep recession need to promote private sector led recovery. This requires lower taxes on enterprise and effort, and a plentiful supply of credit at realistic rates for business to grow and invest.
The best combination from here is gradual tightening of the fiscal stance, bringing down the build up of state debt, and relaxation of the monetary stance through credit being offered to the private sector.
If the G8 and G20 want to make a contribution to economic recovery the US and the EU should not waste too much breath on disagreeing, when their two proposals could be married into a coherent whole. What they need to do instead is to examine the state of the world’s banking system again, and seek ways to allow more private sector credit creation. The danger is the sound of bolting the stable door on the banks long after the horse has bolted, and demanding more cash, capital and tax revenue from banks at the wrong stage of the cycle.
The single most important thing the G20 could do to help recovery is to persuade world markets that no country will renege on its debts. That would be a boost to confidence and a reason to be less worried about certain banks.
June 25, 2010
"Just cutting state spending and borrowing will not of itself generate recovery."
On the contrary, this is the font of the recovery and will allow the free market to operate successfully by releasing wealth back into the private sector and by releasing bank capacity.
Government will require less in income tax and less in VAT and less in market funding for their debt financing. Let no one be mistaken that "Just cutting state spending and borrowing will indeed of itself generate recovery" and the sooner politicians take this on board the sooner we will get a sustainable recovery.
June 25, 2010
If the US doesnt want Europe to slash its deficits it will need to fund the debt requirements of Greece, Spain etc. Ultimately it wants Germany to get out its chequebook and start spending its surplus but the Germans know they will need it to cover the losses from its banks.
Its pass the parcel with a ticking bomb inside.
June 25, 2010
I hear Mr Cameron is calling for less hype. That's a little strange given that the budget is really only hype. As you have pointed out government spending is going up over the next 5 years, which in my book doesn't really equate with cuts. Let's hope things change soon.
June 25, 2010
We're 15 years further down the 'progressive' road than the USA so President Obama can afford to keep on spending other people's money in the meantime. As the former Chief Secretary to the Treasury made clear, we've already ran out.
June 26, 2010
They are both wrong. Government running a defecit to stimulate the economy would be perfectly ok if it was used to stimulate the economy. Instead it is being used to stimulate bureaucratic empire building. If it was used to pay for corporation tax cuts, as redundancy payments for 50% of government employees (what Digby Jones said could go without harm) & to pay for high technology X-Prizes that would be fine. Higher growth increases the tax base, reduces the national debt as a proportion of GNP & makes it much easier to pay. It also does far more to make the poor (& everybody else) better off than any form of redistribution can.
June 27, 2010
I would be content with a partial default by any of the PIIGS, provided that they left the Euro Zone. Stop the federalist juggernaut!!!