After the UK government deficit rose in July, do we need to make further spending cuts?

Richard Wellings

The government has behaved recklessly. Assuming a strong recovery, with high growth and rising tax revenues, it gambled that relatively modest spending cuts would be enough to fulfil the deficit reduction plan. The latest borrowing figures betray the magnitude of this miscalculation. It seems likely that the deficit will remain dangerously high, and there is a real risk of the UK losing credibility on the bond markets. A combination of substantial spending cuts and radical deregulation is the only realistic option for the chancellor. The former would reduce the deficit directly, while the latter would translate rapidly into higher growth. By contrast, a stimulus programme would only increase the risks facing the economy. Additional borrowing would put the deficit further into the danger zone and an even larger state would suffocate private-sector activity.

Dr Richard Wellings is deputy editorial director at the Institute of Economic Affairs.

Tony Dolphin

Borrowing figures for the first four months of 2012-13 are far higher than the government’s target because output growth has disappointed. More spending cuts would risk making matters worse. Output growth is weak because businesses are fearful about future levels of demand and so reluctant to invest. More cuts will reduce confidence further, and delay the recovery. This will make it even more likely that borrowing continues to overshoot. The UK’s main economic problem is a lack of demand. The government should take advantage of its low borrowing rate to implement a package of policies, including an increase in infrastructure spending, designed to boost demand. This will increase borrowing in the short term but, by stimulating growth, it will also make it more likely that borrowing will fall in the medium term.

Tony Dolphin is senior economist and associate director for economic policy at the Institute for Public Policy Research.