THE ECONOMY can grow healthily alongside cuts in the government’s annual deficit, the liberal think-tank Centre Forum will argue today.
Using the 1930s as a previous example, the group says that low real interest rates and an absence of strict planning laws led to a housing boom that helped stimulate recovery from the Great Depression.
Housing market liberalisation and cheap money would help this time around too, it claims. “If the economy does not rebound soon, policy makers will need to consider options such as this if Britain is going to avoid an extended, double-dip recession,” writes Professor Nicholas Crafts, author of the study.
Mervyn King (pictured) and the Bank of England should temporarily double the target level for inflation, he argues: “This would have to be clear and credible so that the inflation was fully anticipated by the public and it would work by reducing the real interest rate.”
From 1932 to 1934 the British government reduced its structural budget deficit by nearly two per cent of GDP, the report states. “Yet, from 1933 to 1937 there was strong growth such that real GDP increased by nearly 20 per cent over that period”, Crafts says.
A more liberal planning environment saw the private sector build 293,000 houses in just the year to March 1935, the research states.