Shock figures show UK economy plunged 0.7% in second quarter.

Significantly worse than most analyst estimates of what it was going to be.

Hey, George!

Sack another quarter of a million civil servants, that should do it.

I vote we let G4S run the MP's pension scheme...

Given how the Euro's epic fail is affecting exports, I'm not surprised.

However, given the current administration's economic plan was based around reducing government spending by slimming the public sector, which would not lead to increased unemployment (and therefore increased government spending through welfare payments) because increased private sector activity would compensate for it, I think we can still say 'oops'.

Basically, they took a gamble that hasn't paid off. Lucky they're all millionaires and therefore insulated from the consequences, isn't it?

Jon

The freely admit unemployment would go up. Only when the private sector kicked in would it go down again.
If Labour had go in we'd have higher public spending, probably have a reduced national credit rating and would be paying more on our loans as a result.
Increased walface payment wound exceed the money saved my job loses in the public sector. Unless people can claim more than they used to earn.

'A price worth paying', I'm sure they'd suggest. So we're sitting around drumming our fingers until the private sector rides in to save the day? Haven't we been waiting for that to happen for two years? And how many people's homes, livelihoods and futures have been ruined in the meantime?

It's very much a price worth paying, as long as somebody else is paying it.


Depends. Labour had their own spending reduction plans, which were somewhat less stringent than the coalition's (*cough*tory's*cough) plans. During the least three quarters before this lot got in, the economy was actually growing again. That's why the current situation is characterised as a double dip recession - we were on our way out of recession then Osborne got his hands on the controls and since then we've been sinking like a lead balloon (note: I make no claim as to this being due to efficacy of the previous regime - it could have been that their policies were having no effect and it was going to happen anyway but the fact is things turned round when the coalition took power). So yes, spending would have been 'higher' under the other lot but it would still have been less than under the previous administration. This is an argument economists get into - is it better to reduce spending more, which will obviously allow you to reduce the debt quicker but in the process reduce taxation income and increase welfare spending or make lesser cuts, maintain more taxation income and increasing welfare costs at a slower rate. The question is where the balance exists that maximises debt repayment while minimising the effect on income and 'societal cost' of cuts. Call me a cynic, but I really don't trust a group of men who live on inherited money and haven't ever had a proper job between them to be able to spot where that balance point is. I simply don't think they have the analytical skills. Bluntly, I think their desire to reduce the size of the public sector is based much more on ideology than intellect.


Err... autocorrect issues? I understand the point you're making, but I'm afraid its incorrect. The increased welfare payments don't have to be more than the person previously earned, they only have to be more than the person previously paid in tax. If they do, then the person becoming unemployed is a net loss to the state coffers.

Which of course brings on a corollary point - if you're expecting the private sector to rescue the economy, there have to be people to buy the goods and services that the private economy supply. If large numbers of people previously in public sector employment are becoming unemployed, the wages they would have spent are no longer available as income to the private sector. It's possibly the case that higher unemployment even affects the willingness to spend of those who aren't employed by the public sector, simply by being 'bad news'.

It's a fallacy, IMO, to consider the private and public sectors as distinct entities which operate in isolation. I would personally describe them as 'coupled' in a domestic economy - the idea that one can thrive while the other shrivels doesn't work either way round. There is again a balance point where the system as a whole is healthy but again I have no faith in the current administration being able to spot that point, or in fact cvaring if it exists at all.

While it's reasonable to suggest that the eurocrisis has had a depressive effect on the UK economy, most of the UK economy is still domesticly based -it's people in the UK buying goods and services from companies in the UK. The things that are going to depress that isn't whether France's credit rating is going to be reduced, it's the fact people are worried that they are going to lose their jobs and that their staple bills are rising due to high inflation. The current strategy entirely ignores those factors, and in some cases actually exacerbates them.

When it comes down to it, if we're going to hold the Eurozone responsible for all our woes, how come Spain's economy shrank at half the rate ours did in the last quarter? Spain, for pity's sake. And as for the notion that we must do whatever it takes to protect our credit rating, I see the logic but I'm not sure it's a valid strategy, since the credit rating agencies judgement seem to me to be bordering on arbitrary. I'm sure if it was in their interests they'd downgrade us without a second thought and evidence be damned. We don't have to look too far to find evidence of large financial institutions abusing important systems for their own profit...

Jon

Surely if a persons wages are paid by the tax payer then when they're made redundant, then all their wages are saved minus tax previously paid and benifits paid afterwards.
Eg. £400 week paid in wages, lets say +/- £100 paid in NI and Tax. So the cost to the state is actually £300.
Once they're laid off the state is saving that £300, but paying benifits. What is it these days? £50 per week doll money? So the state is still £250 better off.

All this public borrowing and stimulating that's going on in Europe is meerly treating the symptom. The cause is that countries are spending too much. That has to change. We/they can't keep borrowing and borrowing to make things easier in the short term as they'll ruin us/them in the long term.
Nobody want services cut, but we have to accept that even in the good times we were paying for more services than we could actually afford.
The private sector went down hill first (I felt that first hand), now it's the public sectors turn.
Yes you can blame bankers (and they are guilty), but that doesn't change the fact that public services were and still are unaffordable at the current levels.

Yes, however that's a rather simplistic model. What about the VAT on the goods they are no longer able to buy? That's 20% of a large chunk of the other £300 for example. What about the duty on the fuel they no longer use to get to work? What about the lost income to public services (e.g. fares paid on public transport for example) that the state will somehow have to find in other ways? I think suggesting the state gets back 25% of the income of a public sector worker is probably a significant under-estimate. And I'd further suggest that, as a percentage, more of the kind of low paid worker's we're seeing made redundant finds it's way into government coffers than the more highly paid, because the ways the majority of the population are taxed are regressive.
There is also the point that the benefits paid may well be higher than you're estimating. It's not just jobseeker's allowance, it's housing benefit and free prescriptions and free school meals....

I think there's much more 'cycling' of money in the economy between public and private sector (and between the population and the state) than most people would go for as a first estimate.


No argument. The question is as I posted - at what point do austerity measures start to put such a brake on the domestic economy that they cause more overall harm than good?


'Turn'? It's not a game you know.


In fact I largely blame the politicians....

Jon

You're assuming that:

a) decreasing public spending won't decrease private sector activity
b) The more the government cuts, the lower the deficit will be.

Both of these are completely fallacious arguments. Decreasing public spending has had a demonstrable impact on the private sector, particularly construction and services. The state then has to meet the cost of the dole for these people who were previously employed.

The deficit this year has grown despite the cuts, this is because Gideon has crashed the economy. The more the economy shrinks and tax receipts go down, the more the debt to GDP ratio and budget deficit increases.

It is entirely possible for the government to spend money to stimulate economic growth, we saw it in 2009/2010 when Alistair Darling was still Chancellor.

As the IMF stated, deficit reduction should be put off until the economy is showing clear signs of recovery. As things stand, the government is destroying confidence, undermining growth and making things worse. The IMF said the deficit reduction "plan" has cost the UK 2.5% growth since the coalition government came to power.

It's a considerably older principle than that. It's how Germany rebuilt itself after the Weimar republic and how America finally pulled itself out of the depression in the 1930's. OK, you could argue one of those didn't end particularly well . Nevertheless the roughly 'Keynsian' approach has more consistent record of restoring growth and confidence than Austerity does. The last country to try that on the scale the UK currently is was Japan, and it took them a decade to get over it even after they changed their minds.


On the official numbers, the economy has not grown overall since the coalition came to power. There's no control group to say what would have happened had a different policy been applied obviously but you have to say it doesn't suggest their tenure has been anything like a success so far...

Jon

There's a few factual errors there I'm afraid. Prominently, the Japanese example is flawed, what they did was a whole lot of nothing, and the effect has been to run up a deficit that totally dwarfs ours without creating any growth.

The German and American examples are also flawed. Hitler's economic miracle is a perfect example of what can go wrong when you use borrowing to fund growth, they spent virtually all of the money on the military, which is economically unproductive and did nothing much to drive exports or increase the efficiency of the economy - increasing productivity is the way an economy should grow, and no substitute for that is to be considered a solution. At the start of WW2, Germany was effectively bankrupt. The cynical among us might even think of invading Czechoslovakia and Poland as a proxy for exporting that military spending and gaining revenue from it. Think of the German military expansion as a Keynesian 'Pay a man to dig a hole, and pay another to fill it in' type solution, but taken to extreme lengths and with disastrous results.

The New Deal is controversial to this day. Some think it it saved America from a vortex of insurmountable debt; others that it caused more harm than it fixed. Either way, it was WW2 that sorted out the mess and ND was a stop gap.

There are much more recent examples of austerity, and some of them seem to have worked pretty well http://www.economist.com/node/21556580
Our need is nothing like so dire as theirs, but then neither is our austerity as severe.

As you said, the UK economy is dominated by domestic spending, which can only grow once households feel capable of spending more. There are lots of people who unwisely ran u large debts during the last decade or two and who need to pay those down. The UK govt did the same, in an ideal world the UK govt would hold off paying down its debts until households have done their share, but as a lot of that excess debt lies in mortgages, this is tricky, and maybe not even possible. If Gordon Brown hadn't been such a wuss and had used taxes instead of debt to pay for spending while he was in charge, there would be a lot more leeway now. But much of our debt is off the balance sheet, and if we push too hard our credit rating might have to start reflecting that.

I think it's pretty scandalous that PFI hasn't been brought into the books already, and I think we would be better off putting the real numbers out in public immediately. But I suspect that if we did it would lead to a straight choice between austerity (probably worse than is on offer right now) and a credit crisis. Unfortunately they seem to prefer to carry on with one of New Labour's most despicable policies by piling up more hidden debt in pursuit of a policy that does not increase productivity or employment in many cases (if any at all).

Until people start spending again, it won't make any difference what governments do. It's the use of wealth that drives the economy, nothing else.

Well I've been doing my share of spending this year. Wiped out a lot of saving redecroating almost the entire house and had new carpets, sofa etc.
Now I'm skint
Doesn't help that I haven't done much work recently.

I've spent all my money on heating oil.