Lord Flight: Deficit financing might get a lot harder so Osborne should cut faster now (ConHome)

Lord Flight writes for Conservative Home and highlights the CPS publication “How to Cut Government Spending: Lessons from Canada”. 

“The massive increase in public debt from 60% to 76% of GDP by 2016 lands the next generation with both far larger debt servicing costs and massive debt to repay. As the recent CPS Point Maker Paper, “How to Cut Government Spending – Lessons from Canada”, points out, since addressing its excessive deficits, Canada has had the highest growth rates of the developed economies.

Its two key policies were achieving smaller Government and smarter Government. Correctly, it relied far more on spending cuts than on tax increases. Mistakenly, most of the UK measures to date have comprised tax increases, not surprisingly, slowing economic growth. Moreover, while the initial UK plan to eliminate the structural deficit by the end of the Parliament, though not exactly bold – had a logic. In response to lower growth forecasts in the 2011 Autumn Statement, the plan has changed, subtly, to sticking to the initial spending plans but continuing to increase debt and deficits into the next Parliament. It is fortunate that over the last year spending has risen less than forecast – by 1.6% versus 3.1%; but this does not change the material point that if we want to return to better levels of economic growth sooner rather than later, and avoid the risk of encountering funding problems, it would be wiser to get on with larger cuts in spending now.

So far the Government has been able to fund its deficit cheaply, substantially, via the Bank of England’s massive QE programme – the Bank of England effectively buying the Gilts. There is an economic logic to matching fiscal tightening with loose monetary policies and even to the QE printing of money to keep up the money supply. This cannot, however, be done for long without risking it leading to a major burst of inflation as and when the economy recovers. Also, the Chancellor would be hugely ill-advised to assume that it will be easy to finance deficits of the size planned for another 4 or 5 years. In short, therefore, there is a powerful argument for the UK getting on with cutting public spending more aggressively, now, in order to avoid the risk of being forced into far harsher spending cuts later. Moreover, if the sort of programme pursued successfully over the last 15 years by Canada is followed, the nature and extent of larger cuts, rationalising the public sector, would be “chicken feed” in comparison to that which is now being forced on Greece, as the result of spending and debt getting out of control.”

To read the full article by Lord Flight, visit Conservative Home.

Remember to read the publication, How to Cut Government Spending: Lessons from Canada.

Date Added: Thursday 23rd February 2012