Fiscal stimulus 'Plan B' would be disastrous for UK

Nick Hayns writes for Public Service Europe

It seems to be something of a truism in politics that if an untruth is repeated loud enough and with enough frequency it becomes imbued with a de-facto plausibility. 'It must be a good idea if I keep hearing about it'. That kind of logic. Therefore, our senses are now regularly assailed with the news that families "up and down the country" are being harmed by these "savage cuts". Government spending is being cut "too far and too fast". Barely a news report goes by without one or more of these 'facts' receiving an airing. But, the truth is that these savage cuts are, in fact, very mild – nothing is being cut too far and it is certainly not happening too fast. If families up and down the country are worried about them, it is probably just because they have been watching too many news programmes.

The latest popular myth to add to the pile is that, with economic growth proving damnably elusive, one big spending push would get us back on the move. One last fiscal stimulus, one last Keynesian gorge. One last spending spree to get things built, to get people into work, to career us towards a full-employment nirvana. It is an idea gaining alarming currency in recent discourse. The technical term for this madness is "Plan B". The fundamental problem with Plan B – and the reason it is so politically seductive – is that it might well increase output in the short term. Gross Domestic Product includes government spending at source so the initial calculation is quite basic in the first instance. Increase government spending, increase GDP - equals masterstroke.

However, the problem comes in the second year following such a stimulus package when the boosting effect starts to drop. By the third year, the effect has entirely worn off, the public debt has been inflated substantially and the necessity of repaying that debt becomes all too clear. That debt cannot be financed by further borrowing, but instead by tax rises – themselves having a further dampening effect, possibility dragging the economy back into recession. After the vast fiscal expansions that were embarked upon by many western governments following the recent crash, it is entirely possible that we are currently feeling the resultant negative effects. In fact, it is possible that - without them - we would be enjoying faster growth right now.

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