The Coalition's Economic Strategy; Has it made a bad thing worse?

The source of the present recession in the UK and elsewhere was the world‐wide financial crisis that followed a generalised collapse in inter‐bank and bank lending to the private sector, which led to huge falls in spending and a collapse in output in most developed countries. By effectively ignoring this amplified credit effect, supply‐side explanations place their emphasis instead on changes to the pattern of productivity shocks, downgrades in risk premia or shifts in aggregate production functions. Our review of some high profile examples of supply‐side accounts suggests that the evidence is against them and a world‐wide fall in aggregate demand seems a more likely explanation. Nonetheless, the supply‐side view still appears to be the approach preferred by the Treasury suggesting, as it does, that present levels of slack in the economy are small. The Coalition's main response to the recession here has been fiscal consolidation, based on the claim that the jump in the fiscal deficit was not due to the world recession and was instead caused by Labour's profligate spending. Also, the Coalition's strategy treats the two problems; that of ensuring recovery and that of achieving a sustainable debt ratio in the longer term as if they were the same problem. Not only are these two claims wholly wrong, the risks they pose to the economic future of the country are very large and of long duration. It is already evident that the “cuts now” programme has retarded the recovery as it assumes, incorrectly, that the deficit can be reduced by making cuts to spending without these having adverse effects on economic growth. And its precipitate rush to cut Welfare and non‐investment Education budgets are visibly leading to worse, not better, efficiency outcomes in these key sectors, in spite of government claims to the contrary. A low wage, low productivity economy seems a highly likely outcome of the present policy over the medium to longer term.