Robert Skidelsky, the biographer of John Maynard Keynes, last week wrote in The Guardian about the stagnant state of the UK economy since the Chancellor of the Exchequer (equivalent to the Finance Minister in NZ) George Osborne delivered his austerity budget of 2010.
Fiscal contraction. Osborne promised to take out £112bn over four years with the intention of restoring confidence of the markets. According to Osborne the reduction in government borrowing is equivalent to transferring money to the private sector. The private sector will have £83bn more (£112bn – £29bn in higher taxes) to spend and private spending is seen more beneficial than government spending. Therefore aggregate demand (AD) should increase and the economy should grow at a higher rate. Fiscal contraction is the royal road to a buoyant recovery.
Fiscal Expansion. That money should not be taken out of the circular flow. Taking £112bn out of the economy will be a net subtraction from AD. The £83bn cuts in public spending because the first effect will be to reduce employment, and hence reduce the national income. Fiscal contraction is the royal road to stagnation.
Most analysts seem to agree that another bout of quantitative easing is in order as it did help to stabilise the UK economy in 2009-10. But the printing of money does not ensure that it is spent. As Keynes put it:
“If… we are tempted to assert that money is drink which stimulates the economy to activity, we must remind ourslves that there may be several sips between cup and lip”
Skidelsky proposes a Plan C in which much money will be spent by areas like green projects, transport infrastructure, social housing and export-orientated businesses. A National Investment Bank would enable the Chancellor to continue to breach public austerity while silently undermining its depressive effects.
Below is a video of Skidelsky at the OECD conference in Paris last year talking about how to get out of the recession.