January 2013 newsletter – Defending austerity

Dear Sir,

May I comment on the careful ‘partial’ defence of fiscal austerity by John Fender in the October 2012 Newsletter. If, as he argues, rising budget deficits and debt to income ratios may bring about significant offsets to the positive effects of fiscal stimulus, would he consider the following argument, especially with regard to the UK?

The greatest long-term issues facing the world in general and the UK in particular are global warming and climate change. Tackling them requires much increased and sustained expenditure on green friendly infrastructures. The UK is experiencing as Fender points out a serious double deep recession with high (and unacceptable) rates of unemployment and excess capacity. Would it not be sensible then for the government to raise expenditures on green friendly infrastructures and finance these through cheques drawn on the Bank of England, quantitative easing via direct expenditure rather than indirectly through the purchase of financial assets?

Such measures would not worsen either deficits or debt to income ratios but would serve to tackle both the immediate problems of unemployment and make a start on tackling those much longer term issues.

When unemployment is significantly reduced, if there is still a worry about deficits, would it not be possible to continue green friendly expenditure but now financed by increased taxation, so as to use the balanced budget multiplier? I realise that such procedures are ruled out by Euro institutions but not in the UK or in the USA.

Geoff Harcourt
School of Economics
University of New South Wales

Related resources