Toughening up on cuts might not reduce the deficit

Dear readers. Prof. Victoria Chick and I  had a letter in the Financial Times today. Am inserting it below for your information…..

Published: October 4 2010 05:27 | Last updated: October 4 2010 05:27

From Ms Ann Pettifor and Emeritus Prof Victoria Chick.

Sir, Kitty Ussher (“Miliband must toughen up on cuts”, Comment, September 29) is concerned that Labour should win credibility with the public on economic issues, and in particular on the government’s deficit. To do so requires some understanding of economic fundamentals.

By calling on Ed Miliband to “toughen up on cuts”, she sets up false dichotomies: between cutters and postponers; between deficit-cutting and stimulus. The debate is not between these but between expenditure-cutting and stimulus.

While we agree there should be a “plan to cut the deficit”, the question raised is whether expenditure-cutting (and tax-raising) will actually result in a reduction in the deficit or an increase? Our research shows, using UK data from 1918 to 2009, that a persistent expenditure cut was correlated with a rise in the debt/gross domestic product ratio; and expansions in expenditure with a fall in debt/GDP.

This result arises because government is not in a position to determine its own deficit/surplus. The size of the budgetary outcome depends on the plans of the entire economic system and its reactions to the government’s planned actions.

Since the deficit is not something that government can control, setting out to reduce the deficit is to look at the problem through the wrong end of a telescope: the way to reduce a deficit in a time of unemployment and feeble recovery is to spend (preferably wisely) to promote employment and permanent improvements to our infrastructure, including our “human capital”.

Keynes looked through the telescope the right way round: “Look after the unemployment, and the budget will look after itself.”

Ann Pettifor,  Fellow, New Economics Foundation,  London SE11, UK;

Victoria Chick, Emeritus Professor of Economics, University College London, UK

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1 comment to Toughening up on cuts might not reduce the deficit

  • Ann and Victoria are so right and the coalition is so wrong.

    We cannot rely on governments to get it right. We cannot be bystanders and leave it to them. We have to campaign and educate politicians – we being 6.7 bn citizens throughout the world who together have immense power. Use your anger and outrage – about the way we have been ripped off by bankers, Big Co and governemnts and kept in the dark – to provide the energy to act. Use it to challenge the myths about continuous growth, unfettered free trade and global sourcing for lowest cost. Use my new free PDF book – A Better World is Possible – as your camapigning handbook. Learn more from it about how the crisis happened, what Maynard Keynes and Gandhi still have to offer us and the sensible way out of the crises we face – not just financial, but ecological too and how we can make the world more just, more democratic, do less harm and reduce violence.
    Sincerely
    Bruce Nixon http://www.brucenixon.com/betterworld.htmlandhttp://www.brucenixon.com/pdf/article.KeyCampaigns.pdf.

    Comment By Bruce Nixon on December 21st, 2010 at 10:47 am

    CORRECTED VERSION – ADDITION OF WEB CONNECTION FOR PDF

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