Are those two events linked? I would suggest that quite emphatically they are. My reasoning is simple. One of the identities that describes the make-up of our gross domestic product is:
Y = C + G + I + (X-M)
where)and I know I simplify, but not in any way that changes this argument):
Y = GDP
C = Consumption
G = Government spending
I = Investment
X = Exports
M – Imports
In other words, government spending is part of our national incomes. And that has to be the case precisely because what our government spends does, literally by definition, or because of the inevitability of double-entry book-keeping, become someone else’s income.
And what that means is that when a government deliberately shrinks its spending in an attempt to balance its books it shrinks national income.
No, the G in the GDP equation is not government spending. It is government spending upon final goods and services. It does not include transfer payments. What is it that is being cut? Transfer payments to hear the squeals about welfare spending, no?
In fact, theoretically at least, the government could eliminate all transfer payments entirely and while that would definitely close the deficit – produce a very decent surplus in fact – it would make no difference at all to the G in the GDP equation.
Snippa’s just charged off into the mist of his own ignorance again.