THE SPENDING cuts and tax hikes scheduled to hit the UK in 2013 are milder than most other advanced economies, according to a Goldman Sachs research note out yesterday.
Fiscal policy is planned have a tightening effect of about one per cent of GDP this year, Goldman estimates, as the government brings the budget deficit down from the 11 to 12 per cent of GDP it hit during the heights of the crisis.
But criticism from Labour and other commentators, attacking the government’s austerity programme as “too far too fast” is wrongheaded, Goldman suggests. “Contrary to popular perception, the speed of the planned fiscal adjustment in the UK in 2013 is actually slower than it is in most other advanced economies,” the authors say.
And even though the cuts will add to the demand shortage in the UK economy, failing to arrest the speed the national debt was growing would have risked a debt crisis led to “a much worse demand problem” in the long run, the researchers say.
These comments came in a note arguing that chancellor George Osborne and the Treasury would stick to their so-called Plan A – and continue trying to erase the cyclically-adjusted structural budget deficit.
Goldman said it thought the Office for Budget Responsibility (OBR) – the official fiscal watchdog – had now revised its forecasts to a reasonable point, after data came in consistently far worse than predicted. Since policy is made based on OBR projections, if these are roughly accurate, the chancellor will not have to engage in any extra unpopular austerity measures to meet his remaining deficit target.
And loosening up fiscal policy was not the only economic intervention Goldman thought to be on balance misguided. The bank’s researchers claimed evidence had shown that the Bank of England’s quantitative easing programme was “largely ineffective in reducing the cost and/or easing the availability of credit to the private sector” and said the Bank was unlikely to add to its £375bn stock of gilts in 2013.
Further, the authors did not place faith in a switch to targeting nominal GDP, a policy switch raised by incoming Bank of England governor Mark Carney and welcomed by Osborne, and claimed such a change could lead to out-of-control inflation.