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Spending won't stop the slump, warns City
Hugo Duncan, Evening Standard21 Oct 2008
The City today warned that Government plans to spend its way out of the economic crisis would not stave off a deep and painful recession.
In the spirit of John Maynard Keynes, Alistair Darling has pledged to bring forward billions of pounds of spending to invigorate the economy in a dramatic raid on future budgets.
The Chancellor intends to fast-track construction of schools, hospitals and housing as the country this week braces itself for confirmation that the economy is shrinking for the first time since the recession of the early 1990s.
But economists warned the Chancellor's plan would not prevent recession and could store up problems for the future, given the parlous state of the public finances.
Howard Archer of Global Insight said: "The economy needs all the help it can get but the problem is it is going to store up problems for later on. The public finances are already in a mess and this is going to make it worse. But the other argument is that if they don't do this, the economic downturn will be even worse, and that will hit the public finances."
David Buik of BGC Partners said: "For the UK government to adopt John Maynard Keynes' economic policies, which came to the fore in the early Thirties, as a remedy for pulling the UK economy out of a deep-seated recession in 2008, is absolute madness.
"Do they not understand that the endemic problem that has destroyed the fabric of our economy and society is the fact that government and consumers are overborrowed? Why fuel the flames of economic capitulation? This country is not in the position to service gargantuan debt." Darling will call on Government departments to bring forward capital expenditure from planned budgets in 2010-11, with focus on supporting business and jobs in the construction industry. In the recession of the 1930s, Keynes urged the use of public money to finance job creation.
"Much of what Keynes wrote still makes sense," said Darling. "You will see us switching our spending priorities to areas that make a difference. Housing and energy are classic cases where people are feeling squeezed." Simon Hayes of Barclays Capital said: "It will help particularly if the spending is concentrated on areas of the economy where supply capacity is weak. Any help the Government can provide there will assist the economy both in the short term and the longer term."
George Buckley of Deutsche Bank said: "This is necessary, it's helpful, but it is not going to stop a severe recession."
Reader views (3)
Its typical for economists to argue that the plans announced by Darling will not avoid recession when its obvious to all the country is in a recession. What now has to be avoided is the possibility of a depression as defined as "any economic downturn where real GDP declines by more than 10 percent".
Even if credit was available again there is every possibility that consumers will be reluctant to add to their personal debts with more borrowing. It would only take a drop of consumer spending by about 10% over a relatively short period for the economy to head south..rapidly...
Politicians , economists and bankers are well aware of this but some are still playing politics , scoring cheap points. A quick check in the department stores around the country will show that already consumers are tightning their belts, and with Christmas around the cornor retailers are very nervous.
Each industry needs to be implementing a consumer rescue plan, and more importantly not be shy about advertising it because once the consumer loses the spending habit it may be hard to entice them for a long time as happended in Japan in the 90's that lasted over 10 years.
- Damien Vaugh, SE London, 20/10/2008 11:18
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Just let them ask for yet another tax rise. At that point, civil disobedience and armed insurrection to overthrow the monarchy and the government will be inevitable. We DO NOT NEED these people.
- Neil, london uk, Airstrip ONE ., 20/10/2008 11:09
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And who will pay for the Governments largess of public spending?. Yes, the very same taxpayers and savers who will be paying for the bail out of the banks, the farcical cost of the Olympics and the damaging and all consuming financial drain of the conflicts in Iraq and Afghanistan. Welcome to 10 years of Nu-Labours economic mismanagement of the British economy.
- Pete, Croydon Uk, 20/10/2008 10:46
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