This post first appeared as a letter to the Financial Times on 25 May 2012.
In yesterday’s FT Chris Giles rightly argued that economists should be wary of taking sides in the excessively political debate between Plan A advocates and those who urge slower cuts until growth picks up. Uncertainties about the cause of weak growth abound, and fiscal credibility matters.
But for exactly this reason it’s odd that he equates “fiscal stimulus” with extra government borrowing. In doing so he overlooks the International Monetary Fund’s proposal for a funded fiscal stimulus by cutting low-growth spending and shifting it to growth-enhancing infrastructure investment. Christine Lagarde may have pulled her punches at the Treasury, but Tuesday’s IMF statement clearly implies that the government should look at this type of fiscal boost now, turning to fiscal loosening only if growth continues to be weak.
Readily identifiable cuts to £15bn of middle-class benefits and tax breaks – needed by 2016 in any case, to eliminate the structural deficit – could, in the meantime, fund an infrastructure splurge that would boost output substantially. That, in turn, would stimulate complementary private sector investment without adding a penny to the deficit.
The economic debate on growth increasingly resembles the hopelessly polarised political one. Economists should indeed be wary of taking sides – but the IMF has pointed out that they don’t need to.