Fighting recession


My colleague Dr Madsen Pirie had a piece on the Telegraph blog yesterday responding to the Bank of England's decision to cut interests by 1.5 percent.

He made the point that there are two ways to respond to a recession. One is for the government to "borrow up to the hilt and beyond, and spend like a drunken monkey" in an attempt to keep the economy going. This seems to be the government's favoured approach, supported by the lie that the UK is not as indebted as other countries (on which point, see the video below).

The other, better approach is to "make it easier for private borrowing to sustain business activity", which is what the bank has done with its interest rate cut. Well, that's good in as far as it goes.

But Madsen also makes the point that cutting interest rates is not enough. If the government wants to get the economy going, they need to cut taxes as well – both to put more money in people's pockets, and to strengthen incentives for businesses, investors, entrepreneurs. The key to this working, though, is that tax cuts are coupled with spending reductions – not more borrowing. Borrowing is nothing more than deferred taxation after all, and besides, there's plenty of public sector fat that could be trimmed.

Nonetheless, there's only so much that policy changes can do. As Madsen concludes:

Neither the Prime Minister nor the Chancellor seem to have learned that governments don't pull us out of recessions. If they are wise, they might make it easier for people to pull themselves out of a recession. That's all.