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Should the Government cut now or cut later?

A debate is raging between British economists as to when this or the next Government should begin a programme of severe spending cuts – should it cut now or cut later?

A group of 20 economists wrote to the Sunday Times last week to urge the Government to ramp up its pre-Budget plans for spending cuts or risk the stability of the UK economy. But in response, 60 economists wrote to the Financial Times on Friday and urged the Government to carry on with its plans.

But who’s right – the doves or the hawks?

The doves – including two Nobel laureates, five former Monetary Policy Committee members and two former Bank of England governors – think the Government’s current timetable is “sensible” and think that any sweeping cuts in 2010 will push the UK back into a recession.

Royal London Asset Management chief economist Ian Kernohan says the doves are right to urge restraint, as no government will be able to make massive changes until 2011 anyway.

He says: “Whoever is planning the first post-election Budget will have to have a programme of fiscal retrenchment over a number of years, it isn’t going to come in day one, it will be going into 2011 and 2012.”

Schroders European economist Azad Zangana agrees. He says the markets are not concerned with the speed of the cuts rather they just want to see details of possible cuts, post-election.

“My concern that market attention is now shifting to the UK as the weak link in the chain, that’s why there is a real danger that this country is in the firing line next.”

Simon Ward

He says: “Any acceleration in tightening now could potentially cause a double-dip recession. But if you look at the forecast for the deficit and look at the plans set out in the pre-Budget report, there is a £35bn shortfall, which is worth about 2p to 3p on the basic rate of income tax – that is really why the markets are concerned.”

But the hawks want action, not words. Last week 20 economists, with the backing of the Conservative party, argued that the current plans outlined by the Government risk a loss of confidence in the UK and may lead to the economy losing its AAA status.

Hendersen New Star chief economist Simon Ward says he errs on the side of the hawks. While he agrees that little can be done in 2010 “the assumption that we are able to continue to finance this deficit with low interest rates is highly questionable”.

He says: “I don’t think the markets are willing to wait for us to make the cut. There is not such a big a difference between ourselves and a country like Spain – just because we have our own currency doesn’t mean that is an escape route in the way that some seem to think. My concern that market attention is now shifting to the UK as the weak link in the chain, that’s why there is a real danger that this country is in the firing line next.

“We need to make the right noises about fiscal retrenchment.”

Ignis chief economist Stuart Thomson agrees that the Government has to move fast and begin planning tough austerity measures now.

“The Government is damned if it does and it is damned if it doesn’t.”

Stuart Thomson

He says: “The argument against speeding up measures is that if you force the Government to increase its savings while consumer confidence is quite weak, so they don’t run down their savings in return. That creates a net savings increase and will create a paradox of thrift, pushing us back into recession.”

Thomson argues that this isn’t ideal but is better risking the AAA rating and the reputation of the City.

“We need an early, clear plan which international investors can understand,” he says, “unfortunately that means the Government is damned if it does and it is damned if it doesn’t.”

So who do you side with? The doves or the hawks?

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. This wretched Government had the ideal opportunity to sort out the economy of this company and shape it for a better, more prosperous, future when the Banking system came close to collapse. At the time I felt that they should have let RBS go down and this would have set the tone with regard to the other Banks remaining but as usual they ducked it. As a country the UK cannot carry on supporting lost causes, Quango’s and all of the other publicly funded organisations. We (the UK) should bite the bullet and have a general clear out, as painful as it will be to start off with, to rebuild the future economy for the future of our children. We should never have bequeathed them this mess!

  2. To answer the question of the title, I would suggest the givernment should start cutting now, but in a measured way so as not to stifle any recovery. Then at least everyone could see that at least some action was being taken.

    Why are the politicians debating either go in heavy as soon as possible or sit back and wait? Wouldn’t a middle course be the most sensible.

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