US economy grows with cuts public spending

The revised first quarter figures for the USA show GDP growing by 2.4% whilst public spending was reduced by 4.9%. It seems the US has an economic policy which works better than the EU’s.

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  1. Simonro
    Posted May 30, 2013 at 2:59 pm | Permalink

    After the 2008 crash, the US government reduced taxes, increased spending, reduced interest rates.

    In the Euro Zone, governments increased taxes, decreased non-social security spending, and at one point the ECB even increased interest rates.

    If only the UK had followed the US example and not increased taxes (VAT), and not reduced investment we might have seen steady growth as well.

    GDP growth started in the US in 2009, and has continued. Now the cuts in state spending are no longer being countered by increases in federal spending, the tax cuts have been reversed, and only the low interest rates remain. Hopefully, the US economy has recovered enough to continue to grow – the uptick in federal debt rates indicates that investors expect to have more rewarding places to put their money, at least.

    • Jerry
      Posted May 30, 2013 at 7:15 pm | Permalink

      @Simonro: “If only the UK had followed the US example and not increased taxes (VAT), and not reduced investment we might have seen steady growth as well.

      Well Yes and no, the point being that VAT only increased after Brown/Darling left office, it was Mr Osborne who increased VAT to 20%. On the other hand Mr Darling reduced VAT from 17.5% to 15% for a period (which did actually boost retail spending and thus the supply side) during or directly after the immediate crash period but then returned VAT back to its original pre-crash level of 17.5%.

      • Simonro
        Posted May 30, 2013 at 10:04 pm | Permalink

        This is true, and funnily enough, our economy did grow briefly before the 2010 election. Some of this was probably dead economy bounce, but the reduction in VAT will have been part of it.

        I think reducing VAT to increase consumer spending counts as Demand side, not Supply, as VAT is paid by the consumer not the business. In fact, the extra work involved in re-pricing probably counts as a Supply side cost.

        The moral panic over government debt has a lot to answer for; 3 years of stagnation for a start :-/

  2. lifelogic
    Posted May 30, 2013 at 3:09 pm | Permalink

    Better than the EU’s is not much of a challenge.

    • lifelogic
      Posted May 30, 2013 at 5:25 pm | Permalink

      The UK’s strategy is just as bad. Over tax, over regulate, over borrow, waste, pointless wars and an over expensive religious energy and transport system with Labour in 2015 to look forwards to.

  3. Brian Tomkinson
    Posted May 30, 2013 at 3:35 pm | Permalink

    Any policy would work better than the EU’s where the mad drive to political integration overrides common sense and economic reality.

  4. oldtimer
    Posted May 30, 2013 at 3:40 pm | Permalink

    The US economy is benefitting from low, competitive energy costs – thanks to its shale gas revolution. This is encouraging insourcing of some manufacturing operations. It also retains a strong entrepreneurial culture and a better demographic profile than its principal global rivals, China and the EU.

    Meanwhile in Europe I read, in Spiegel Online, that the EU Commission plans to inflict heavy fines on Germany because the German government has enabled large numbers of businesses to obtain exemption from the subsidies needed to fund renewable energy schemes. It seems that German consumers and very small businesses also have started to notice that they are having to carry the whole subsidy burden themselves.

    With the EU struggling under the burdens of excessive debts, uncompetitive energy costs and an unaffordable social welfare system and China facing rapid inflation and the prospect of a shrinking – though still large – working age population, the USA is well placed to prosper in the years to come. “Go West!” will, once again, become the watchword for the disaffected, jobless youth of Europe.

    • Jerry
      Posted May 30, 2013 at 7:19 pm | Permalink

      @Oldtimer: Apparently the USA shale gas revolution has caused a glut of coal on the worlds markets, thus lowering prices – of course with the EU (and UK) wedded to the anti CO2 religion there is little chance of European countries gaining any knock-on advantage from this, no we will just see the BRIC countries carry on burning coal and growing their economies…

  5. David Cee
    Posted May 30, 2013 at 4:08 pm | Permalink

    John, surely this just shows the inherent advantages of the US economy:
    – ability to take opportunities quickly (eg. shale gas exploitation)
    – labour market flexibility (physical and the price of labour)
    – openness to innovation and entrepreneurship

    The EU is cleary sclerotic by comparison!

    • lifelogic
      Posted May 30, 2013 at 5:30 pm | Permalink

      Tax freedom day today 150 days of the years just working for Cameron/Osborne to waste it.

      In US and Australia mid April that is the main difference.

      In the France it is July god help them!

  6. behindthefrogs
    Posted May 30, 2013 at 4:15 pm | Permalink

    The US has the huge advantage that it is capable of being mainly self supporting and so is much more immune to fluctuations in other economies. We need to see many initiatives by the UK government to increase import replacement. This can be partially achieved by a much more proactive tax policy. In particular a major reduction in employers NI contributions would be a huge start. If this was carefully focussed it could also help youth employment and improve the cash flow of small companies.

  7. Matthew
    Posted May 30, 2013 at 5:12 pm | Permalink

    Makes the recent IMF claims, about the UK, difficult to square.

    In addition the USA is making a dash for cheaper energy, the UK is going in the opposite direction.

  8. James Reade
    Posted May 30, 2013 at 6:29 pm | Permalink

    As always, which direction is causality?

    The sequester was end of March, meaning that it can’t actually have affected these figures since they are 2013Q1.

    More likely is that the economy is growing, hence spending on benefits and other related items falls.

    Mundane and doesn’t support your political point though, alas, John.

  9. Lindsay McDougall
    Posted May 30, 2013 at 6:57 pm | Permalink

    Where did that 4.9% reduction come from, and is it in real terms or cash terms? Perhaps there are two effects – President Obama is spending less on wars and the Republican Congress won’t let him spend more on anything else. That’s a benign combination; it’s almost as if Ron Paul got elected.

    • uanime5
      Posted May 31, 2013 at 3:40 pm | Permalink

      Between 2008 and 20o9 the USA introduced a massive financial stimulus to the economy. As the economy has started to grow Obama has slowly started to reduce overall public spending to reduce the deficit.

      Reply: Not so slowly- if we cut our spending by anything like the amount the US is doing you would be the first to complain, though our economy is now growing.

  10. uanime5
    Posted May 31, 2013 at 3:42 pm | Permalink

    The revised first quarter figures for the USA show GDP growing by 2.4% whilst public spending was reduced by 4.9%. It seems the US has an economic policy which works better than the EU’s.

    Given the massive financial stimulus the US introduced between 2008 and 2009 it’s no surprise that the US can reduce their deficit without affecting growth (this deficit is still above 2008 levels). Odd how you keep omitting the part about the stimulus in these posts.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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