One of the big questions of the moment is whether to cut public spending or whether to push even more fiscal stimulus into the economy. A useful meeting in
The most important session for Reform’s work on public spending, and for the big political questions, was that on fiscal policy, introduced by Simon Wren-Lewis of Oxford University and George Alogoskoufis of the Athens University of Economics and Business (and the Minister of Economy and Finance of Greece until January last year).
The academic research was strongly against temporary fiscal stimulus. The presenters argued that government spending should certainly rise in times of economic slowdown – but this should be achieved through the “automatic stabilisers” i.e. the automatic payments that governments make in hard times, such as extra unemployment benefits. The great advantage of these is that they fall away of their own accord as growth picks up and unemployment falls. Both speakers criticised one-off stimuli on the grounds that they may be politically difficult to withdraw. This supports the finding of previous Reform research.
Simon Wren-Lewis did support such stimuli in absolute crisis situations, such as that faced by the global economy 18 months ago. But even here the benefits have to be weighed against the costs, not least risks to credit ratings.
What about cutting spending going forward (excluding the automatic stabilisers)? Here Simon Wren-Lewis implied that there are costs and benefits. There will be an economic cost in terms of lower activity, because consumers will be taken by surprise by the cuts and won’t have increased their private spending to compensate. But there will be benefits, not least in the protection of the country’s credit rating and the encouragement of private investment (in some cases).
This is Derek Scott’s (and Reform’s) view – that the benefits of dealing with the structural deficit in the finances outweigh the costs, real and regrettable though they are. The structural deficit is just too important to ignore.
In more normal economic times, the speakers were unanimous that governments have to get borrowing down and that lower interest rates are the right means to encourage the economy. In fact much of the discussion revolved around why governments in the