Painful adjustments will prove worthwhile (The Financial Times)

Head of Economic Research Ryan Bourne and CPS Director Tim Knox write in The Financial Times on Thursday 21st February, in response to Lord Robert Sidelsky and Professor Marcus Miller’s article, ‘Supply Matters – but so does demand’.

To view the article as its original posting, please visit The Financial Times website

“Sir, We agree with Robert Skidelsky and Marcus Miller that the UK’s future prosperity depends on productivity growth (“Supply matters, Mr. Osborne – but so does demand”, February 19). But that is exactly why we should be wary of simply adding more government stimulus, as they advocate.

Five years after the financial crisis, more than £500bn of deficit financing and an extraordinary monetary policy have failed to generate a self-sustaining recovery. Attempting to generate short-term growth, by borrowing even more now, seems illogical. Given prolonged stagnation, it’s clear that the challenge facing the economy is increasing our potential growth rate.

Yes, investing more in infrastructure, skills and innovation, as Profs Skidelsky and Miller suggest, could enhance the productive potential of the UK economy in the medium term. That is basic supply-side reform.

But this does not validate the wider concept of demand management. Most government spending goes to consumption spending and transfers. These are not growth-enhancing – and both economic theory and empirical evidence suggest strongly that, for a developed economy like the UK, it is cutting these that will boost medium-term growth rates.

So far the coalition has taken the politically easy path of raising taxes and cutting investment spending. Cuts to current expenditure have been backloaded into the latter half of the parliament. Abandoning this programme just as it is about to start on what previous consolidations have shown to be the right path would be a mistake.

The medium-term growth rate of the economy depends far more on leaving resources in the innovative and productive private sector economy than on boosting short-term demand. In the short term, some of this adjustment will be painful. But as the LSE Growth Commission showed about the legacy of the 1980 reforms, the long-term benefits make it more than worthwhile.”

To view the article as its original posting, please visit The Financial Times website

Date Added: Friday 22nd February 2013