government spending would create extra government debt and not more growth, according to research published today by the Institute for Economic Affairs.
Comparisons to the Great Depression are ill-founded, the report argues, as current levels of government spending are now far higher than in the 1930s meaning “looser fiscal policy would have even less effect today”.
The report claims that growth took off four years into the Depression, and full capacity was reached within another four, all during a period of fiscal austerity.
“With much higher levels of government borrowing, there is no realistic possibility of such a positive outcome today,” the report warns.
The report’s modelling indicates more spending in the 1930s would have had little impact.
“State spending currently accounts for over half of our national income and our budget deficit sits at £165bn – to suggest that our economic woes can be solved by further borrowing is wrong,” said Professor Phillip Booth from the IEA.
“With a sovereign debt crisis currently raging, the government must hold the course on fiscal austerity and be far bolder with supply-side reform.”