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Motivated by ideology: George Osborne's policies don't add up (BBC Parliament)

The Conservatives' plan to continue to cut public expenditure if they win next year's general election is partly motivated by a desire to reduce the gap between the government's income and expenditure, and partly by an ideological belief in a smaller state and lower levels of taxation. The Labour Party and the Liberal Democrats have promised to continue with policies of austerity to reduce the government deficit. Do any of these policies add up to a sensible strategy, making the best of the opportunities available?

Very probably not. Of course a deficit of almost £100 billion — about 6 per cent of GDP — is much too high, especially if growth is slow or if the economy falters. By 2015 total government debt will be approaching 100 per cent of GDP. Allowing debt to grow with little increase in capacity to service or to repay it is clearly unsustainable. It is not true, however, that the only way of getting the deficit down is to cut expenditure. There are at least two separate reasons for this.

First, it is a fallacy to believe that the national economy is the same as that of an individual, so that cutting expenditure will actually cut the deficit. Second, there is a much better way of reducing the deficit than adopting austerity policies. This is to get the economy to grow so that government revenues automatically go up while the need for its expenditure goes down.

An over-spending individual can certainly get his or her affairs back in order by getting expenditure in line with available income. The national economy, however, is different because everyone's expenditure is someone else's income. Cutting government expenditure runs the risk that, instead of reducing the deficit, it will just make the economy spiral downwards as tax rises and cuts in government expenditure reduce demand. The tax take will fall while pressure for welfare expenditure will increase. Government borrowing will stay as high as it was before while the capacity of the government to meet its debt obligations will go down. This is the worst of all worlds: privation, austerity and stagnation, with no end in sight.

If the economy could be made to grow much more quickly, however, the deficit problem could be dealt with in a different and much more efficient way. With this scenario, the government's income from tax, fees and charges would go up while the need for expenditure on unemployment and all its related costs would fall. 

Even if not all the deficit was eliminated, as long as the growth rate plus inflation were higher than borrowing as a percentage of GDP, total government debt, again as a percentage of GDP, would go down. The position would be sustainable as far ahead as one could see.

Dealing with the government deficit by expanding the economy is therefore clearly a much better bet than trying to remedy the position with austerity programmes. How could we get the economy to grow fast enough, however, to make this possible? There is a way to get this done — and to do it in a way which is wholly consistent with getting government borrowing under control. 

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