Saturday, 29 January 2011

The Great British Experiment

George Osborne and Tim Geithner's speeches, received yesterday at the World Economic Forum, remind us that the coalition's deficit reducing policy is not universally shared.

As Chancellor of the Exchequer and US Treasury Secretary, both Osborne and Geithner took their turn on the stand as an opportunity to defend their country's economic policy. Osborne was first up, declaring that "Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong. You cannot put off the first in order to promote the second." After which, Geithner commented that rapid cuts in the US would jeopardise the US economic growth and long term financial health too. (The amount by which Obama recently committed to reduce the deficit is meager.) Although Geithner did not explicitly challenge Osborne - now that would have been interesting! - their different approaches are striking.

Is there any evidence to say which approach is better at achieving economic growth? Well, whilst both the US and UK have a deficit of about 10% of national income, the US grew by 0.8% in the final quarter of last year and the UK saw a dismal fall in growth of 0.5%.

Actually, a direct comparison like this is not informative. The US has the advantage that their currency holds position as the world currency, and so America can borrow more before confidence is undermined. Remember, this is what the conservatives are worried about - the market losing confidence in the pound because the government won't be able to pay back their deficit. So perhaps, if Geithner was in Osborne's shoes, he too would back the cuts.

What Osborne and Cameron must remember is that the imperative is to promote growth in the UK, not avoid the embarrassment of taking back policy should it turn out that what the UK needs is continued fiscal stimulus. The UK has not yet faced the impact of most of the cuts and considering its precarious position (consumer confidence, according to one measure, has suffered its sharpest decline since 1992) it is not clear that UK economic growth will recover any time soon.

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