Wednesday, 23 June 2010
Inadequacies of the UK Budget
Firstly, Keynes is dead. The entire budget is a paean to monetarists. Which should be great, as I am one. Tim Worstall notes the nice big experiment should be worth reviewing too as it will prove who is right or wrong. However, there is an worry for me that the deflationary effect of the fiscal cuts is going to push inflation lower (Blue Eyes was right on this yesterday in the comments), even with VAT rises and commodity price rises. As such, where is the money supply policy - where is more Quantitative Easing suggested? It will be needed if the economy starts to tip over again and money creation drops off.
Secondly, some of the measures of the economy, like the output gap, have little credulity. This is quite a shame, as rather a lot depends on them being accurate. The ever wise Chris Dillow has looked at this at more length as regards the structural deficit - which is another odd concept that is bandied about but in truth is like trying to nail jelly to a wall.
Finally, somewhat like the Labour Government, these cuts of 25% to public sector budgets won't be known until after the spending review. sadly this is before the pensions review that may have made a decent dent in this aim. Burning Our Money has a good point here, even the famous Geddes cuts of the 1920's barely made it to 25% and this caused the General Strike, the Jarrow March and led to Britain having its first ever labour Government - a disaster from which we have never recovered. So are these cuts really going to happen?
Of course maybe some of these issues will cancel each other out, the cuts won't come but then the spending may help to keep the economy out of recession. The output gap maybe smaller in which case the return to growth will be much quicker - time to be positive. A Keynsian budget would have the markets in crisis today - instead they continue there serene drop...