As calls for the chancellor to apply some fiscal stimulus grow, do we really want more public spending?

Number 11 Downing Street Ahead Of Wednesday's Budget
Source: Getty

Scott Corfe, director at the Centre for Economics and Business Research, says Yes.

The UK economy is set to slow drastically over the coming quarters, with the Centre for Economics and Business Research expecting GDP growth to decline from about 1.5 per cent this year to less than 0.5 per cent in 2017. A recession – at least a couple of quarters of declining output – will be difficult to avoid. Indicators suggest the economy performed terribly in July. In such circumstances, policymakers need to do all they can to support jobs and industry. The Bank of England has cut interest rates and expanded quantitative easing, but monetary policy cannot do all the heavy lifting. Government needs to start doing its fair share to prevent a recession, which means announcing a fiscal expansion in the form of lower taxes and spending in areas such as housing and infrastructure. The fiscal deficit is high and should not be allowed to burgeon, particularly to the point where it reaches the psychologically important £100bn per year mark. But to not do any fiscal loosening in the current circumstances makes little sense.

Sam Bowman, executive director of the Adam Smith Institute, says No.

More public spending is unlikely to stimulate the economy, but a larger deficit may well depress private sector investment. Government spending only boosts growth if the central bank is incompetent and unable to ease monetary policy. But, as we saw last week, the Bank of England is ready, willing and able to – so there is little case for fiscal policy. While there may be a case for government spending on new infrastructure in a cost-benefit analysis, there is not a macro case. Government borrowing comes out of funds that would otherwise be available to the private sector, starving business of investment. Even if we did think that some kind of fiscal stimulus was desirable, government spending would still not be the best way to do it. Research by Christina Romer, chairwoman of President Obama’s Council of Economic Advisers, and her husband found that tax cuts raise GDP far more than extra spending. If we did all become Keynesians tomorrow, we should be tax-cutting Keynesians.

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