Cuts could increase the deficit

6th December, 2009

The Observer asked a small group of people to comment in advance of next Wednesday’s Pre-Budget Report. This from yours truly:

“Public debt will rise higher if government slashes spending, and recovery will elude us. Unemployment has high costs, but productive government spending, unlike private spending, pays for itself by creating jobs that generate tax revenues and cut welfare benefits.

Will the bond markets revolt and raise interest rates? No, because the markets apply common sense, as they did when Britain exited the exchange rate mechanism. Despite a rise in government debt from 40% to about 70% of GDP, and the extension of the Bank of England’s balance sheet by £200bn, bond markets have been positive – only too grateful for a safe haven in turbulent times. Confidence in sterling will only return when the economy recovers, and only then. Without public investment compensating for the collapse in private investment, there is little hope of recovery or confidence.”

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