Page last updated at 14:24 GMT, Friday, 19 February 2010

Economists back delay on government spending cuts

Gordon Brown at the Progressive Governance Conference
The government has pledged to halve the deficit by 2011

More than 60 senior economists have signed two open letters that back the chancellor's decision to delay government spending cuts until 2011.

The letters say that any measures to trim the budget deficit this year could pull the country back into recession.

They are a riposte to the 20 economists who backed the Conservatives' call for cuts this year in the Sunday Times.

Those economists had argued a lack of a credible plan threatened to push up interest rates and undermine recovery.

The debate centres on how and when to bring down government borrowing, which has ballooned following the financial crisis and recession, without hurting economic recovery.

The budget deficit - the difference between government spending and the income it receives through taxation and other sources - is expected to be more than £170bn in the current financial year.

ANALYSIS
Hugh Pym
By Hugh Pym, Chief economics correspondent

It would be mildly amusing if it wasn't so serious. The economics profession is dividing into two gangs and throwing paper darts across the classroom.

But the argument - over how to handle the government deficit - has major implications for the health of the economy. For whoever forms the next government, getting the judgement right will probably pave the way for sustained recovery and a better chance of future electoral success. Getting it wrong could raise the chance of a double dip recession and higher unemployment.

The fact that eminent economists disagree on this critical issue is hardly reassuring for the workers and voters who will be affected by the Budget decisions after the election.

As a percentage of GDP that would be 12.6% - one of the highest of any major economy.

Figures released on Thursday showed that the government had to borrow a further £4.3bn last month to help cover the deficit.

It was the first time the government had to borrow money in January, usually a bumper month for income from tax receipts.

Speaking at a conference in London, Prime Minister Gordon Brown reiterated that there would have to be tax rises and cuts in spending to reduce the deficit.

"We have been crystal clear that we will halve the deficit over the next four years - indeed, more than halve it," he said.

"But the vast majority of the increase in our deficit since the global financial crisis hit the UK has been caused by a decline in estimated tax revenue - and so we must redouble our efforts to restore growth and get people back into work," he told the Progressive Governance Conference.

'Undermining confidence'

The Conservatives have called for more radical, earlier action and said their approach had widespread support.

"There are leading economists who support the Conservative position and, more importantly, there are also leading business organisations and entrepreneurs - people like Richard Branson - who know more about creating jobs than the entire Labour cabinet put together," said shadow chancellor George Osborne.

The writers of these letters are in danger of writing themselves out of a job
Stephanie Flanders
BBC economics editor

"It's the lack of a plan of action from Gordon Brown that's undermining confidence in the British economy," he added.

Liberal Democrat Treasury spokesman Vince Cable said he agreed that the financial markets needed to see clear evidence that there was a plan to deal with the deficit.

But he said any decision on when to begin cuts should be determined by the strength of the economy in a year's time, which was highly uncertain.

"We've got to look at what is happening in the real economy and not be based on political dogma," he said.

Recovery at stake

Those signing the two new letters in the Financial Times include two American Nobel laureates - Robert Solow and Joseph Stiglitz.

George Osborne and David Cameron
The Conservatives argue delaying cuts would hit confidence in the UK

Five former members of the Bank of England's interest-rate setting committee also put their names down.

Lord Layard, emeritus professor at the London School for Economics and one of the signatories, told the BBC: "Unemployment is high, as people are not spending enough to provide full employment.

"And in that situation the government has to keep spending in order to stop unemployment rising."

He added: "We shouldn't see government cuts until we've seen the recovery well under way and unemployment on its way down."

One of the letters, organised by crossbench peer Lord Skidelsky, accused the authors of The Sunday Times letter of trying to "frighten" the public over the scale of the deficit.

It asks how "foreign creditors will react if implementing fierce spending cuts tips the economy back into recession".

"For the good of the British public - and for fiscal sustainability - the first priority must be to restore robust economic growth," it says.

One of the signatories of the Sunday Times letter, economist Bridget Rosewell, told BBC News: "The economists who have attacked it [the letter] have done so on the basis that there is no real scope for the private sector to recover, and that is wrong.

"Low interest rates and easier credit will help it to recover, whereas if the government is borrowing all the money that is available then that actually will get in the way of a real and sustained recovery."



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