So, George Osborne has confirmed his belief in expansionary fiscal contraction. This is the absurd assumption that if the state shrinks the private sector will automatically grow by more to
make up the difference.
That just isn’t what expansionary fiscal contraction is. that is, instead, the German View. EFC is instead that it is possible to have expansion at the same time as fiscal contraction through the use of large monetary stimulus via devaluation of the exchange rate.
You’ve got to get the diagnosis right in the first place for if you don’t you’ll be a Murphaloon, won’t you?
Osborne is also wrong to assume a government can cut its way to budget balance. As has been proven time and again across Europe over the last few years, this is not true. The assumption presumes that the economy works like a household or company. For either of them if costs are cut (for example, by cutting employment) then, in effect, someone else (the sacked employee or the government) picks up the bill and the company does not. But at the level of the national economy any cutting in government spending is identical to a reduction in someone else’s income unless the economy is at full capacity and close to inflation, neither of which is true in the UK right now. In the situation we are actually in then such cuts in spending simply reduce the size of the economy. Cuts shrink our growth, our incomes and so our tax revenues and as a consequence the chance that any if George Osborne’s objectives will actually be achieved. Cutting right now is the exact opposite of what this country needs.
Go look at the UK in 1931/2 and 1945-8.
Cuts in government spending, economic growth.