Business

Spending cuts: what the economists say

Commuters cross London Bridge on their way to work in the City financial district of London
Image caption Economists are divided over what impact the cuts could have on the UK economy

When the government presents its Comprehensive Spending Review in October, it is expected to outline the biggest budget cuts since World War II.

The government has described the cuts as "inevitable", if it is to restore trust in the UK economy and effectively erase public borrowing over the next five years.

But leading economists are divided over whether cutting spending by so much and so quickly is a good idea.

Concerns remain over the impact cuts could have on the economy.

Below is a selection of views from leading economists.

Andrew McLaughlin, chief economist, Royal Bank of Scotland

"This is a delicate one.

"It's annoying when economists talk about this as if they have a high degree of certainty - it's a judgement call.

"My own view would be that it's necessary to make an early and decisive start.

"It has been suggested that that you need to cut the deficit or risk some vague punishment from the bond markets. That's not the point at all.

"If you don't cut quickly enough in the short term and deal with the fiscal problem, the outcome would be higher interest rates in the medium and long term.

"With the country so highly leveraged, the last thing you want to do is see an increase in interest rates.

"The short-term impact will be to lower growth - you can't help but do that, but i think that you can approach it with a sense of optimism - the private sector will respond."

Lord Robert Skidelsky, professor of political economy, University of Warwick

In a highly critical speech to the Lords in July, the former Tory peer accused the government of "grotesque exaggeration of the dangers of debts and deficits":

"To advocate capital cutting at a time of recession is the worst remedy that one could possibly have.

Image caption Lord Skidelsky has been heavily critical of the government's plans

"It is an insane policy and it will not only destroy the coalition, but it will do enormous damage to the country."

He rejects the idea that failing to cut the deficit will hurt future generations.

"A deficit does not impose a burden on future generations. There is no repayment burden because the government, unlike private individuals, can and normally does repay their maturing debts by continuing to borrow.

"If, however, the public deficit is cut now, there will undoubtedly be a burden on both present and future generations.

"Income and profits will be lowered straightaway; profits will fall over the medium term; pension funds will be diminished; investment projects will be cancelled or postponed; and schools will not be rebuilt, with the result that future generations will be worse off."

Steven Bell, chief economist at the hedge fund GLC

"The deficit reduction plan is much needed. You need a credible plan to satisfy the bond markets.

"While it's true that we as a country have a good credit history, in terms of the bond market, you're either seen as creditworthy or you're not. You want to make sure you're in the right camp.

"Having said that there's not doubt that the risk of these cuts hurting the economy has increased.

"The economic recovery is looking shakier than it did a few months ago. The big impact of the cuts is going to be next year, and the worry is that the economy may not be as strong then as the government hoped."

Bridget Rosewell, economist and chairman, Volterra Consulting

"[Economists have criticised the cuts] on the basis that there is no real scope for the private sector to recover, and that is wrong.

"Low interest rates and easier credit will help it to recover, whereas if the government is borrowing all the money that is available then that actually will get in the way of a real and sustained recovery."

David Kern, chief economist, British Chambers of Commerce

"If successful, the forceful deficit-cutting strategy announced in the emergency Budget would put the UK on a path of sustainable and affordable recovery, and could help create a leaner and fitter economy.

"But, the scale of fiscal retrenchment, and the decision to cut the deficit at an accelerated pace, will inevitably increase dangers of a double-dip recession.

"The new policy faces obstacles, and will only succeed if it is accompanied by a coherent growth strategy."

Lord Richard Layard, emeritus professor, London School of Economics

Another critic of the government's plans, Lord Layard wrote in a letter to the Financial Times:

"History is littered with examples of premature withdrawal of the government stimulus, from the US in 1937 to Japan in 1997.

"With people's livelihoods at stake, a responsible government should avoid reckless actions.

"Unemployment is high, as people are not spending enough to provide full employment.

"And in that situation the government has to keep spending in order to stop unemployment rising.

"We shouldn't see government cuts until we've seen the recovery well under way and unemployment on its way down."

David Blanchflower, professor of economics, Dartmouth College, New Hampshire, US

Image caption David Blanchflower is a former member of the MPC

The former Bank of England Monetary Policy Committee (MPC) member said cutting spending was "exactly the wrong thing" given the current state of the economy:

"We've started to see consumer spending slow. We've started to see the economy slowing with the idea that these spending cuts will hit.

"Spending has to be dependent upon the data and the data has started to slow and in my judgement it would be very mistaken to proceed ahead as the chancellor is doing."

Jacopo Cimadomo and Sebastian Hauptmeier, economicsts, European Central Bank

Commenting on a recent report from the ECB, the economists questioned the value of governments maintaining spending through recessions.

"Our findings suggest that the effectiveness of spending shocks in stimulating economic activity has substantially decreased over time.

"The response of private consumption to government spending shocks has [also] become substantially weaker over time."

They conclude that rising government debt is the "main reason" for people cutting the amount they are prepared to spend, adding to the economic problems.

Roger Bootle, managing director, Capital Economics

"[I] doubt that the conditions are in place for the economy to take such a sharp squeeze in its stride," writes Roger Bootle in the latest economic review published by accounting firm Deloitte.

"Admittedly, the fiscal tightening does not necessarily condemn the economy to a period of subdued growth and the risk of a double-dip recession.

"After all, a fiscal tightening can bring about a fall in market interest rates, as well as a boost to consumers' and firms' confidence.

"Cuts in public spending programmes can create opportunities for the private sector to fill the gap, spurring private sector investment.

"However, the UK currently has very few of the conditions that have generally helped other economies to maintain strong rates of growth throughout their own squeezes.

"The upshot is that the scope for the fiscal squeeze to have big positive effects and/or for the rest of the economy to compensate appears limited.

"The squeeze should still put the UK economy on a firmer footing eventually, with less of a role played by the relatively inefficient public sector. But we find it hard to see how it will not hurt in the near-term."