The Chancellor should listen to new calls for a stimulus

by Duncan Weldon
3:27 pm - July 27th 2012

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After this week’s disastrous GDP figures there have been more calls for the Chancellor to change course and start to stimulate the economy. That’s maybe not a surprise; many of us have been making this call for the past two years.

More interesting is the source of today’s interventions.

Richard Lambert, former head of the CBI, former member of the monetary policy committee and former editor of the FT, writes today that (behind FT paywall):

One sensible suggestion from the IMF was for temporary tax cuts targeted at lower income households, who would be likely to spend rather than save the benefits. Also sensible would be measures to support the construction sector, housing above all, which is one of the main drags on output and where investment for the future is so badly needed.

Meanwhile an editorial from Bloomberg argues that:

Cameron needs to delay fiscal consolidation and make it plain that’s what he’s doing.

Then, he’ll have an instrument that’s ideally suited to delivering reversible fiscal stimulus, the value-added tax. A one-year VAT cut would lower retail prices and encourage consumers to bring purchases forward, giving a temporary boost to demand. He should supplement this with a new program of spending on infrastructure. This is investment that the U.K. badly needs in any case, and whose financing cost in inflation- adjusted terms is less than nothing at today’s interest rates.

Both of these calls chime with the view of the IMF.

There is now a widespread consensus building on the need for an immediate demand stimulus focussed on tax cuts for the low paid and infrastructure and housing spending.

The Government’s tentative steps towards more infrastructure spending are of course welcome, but are unlikely to get up and running until mid 2013. That may well be too late.

I very much doubt that Richard Lambert, Bloomberg, the TUC and the IMF agree on all the issues but it’s becoming painfully clear what needs to happen to in the short term, a fiscal stimulus to end the long slump and get the economy moving. It’s time the Chancellor listened.

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
· Other posts by Duncan Weldon

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Reader comments

2:47 pm, July 30, 2012

1. Fungus

Here’s an article which quotes recent research on deficit spending or ‘stimulus’:

http://www.marketoracle.co.uk/Article35749.html

From the article:

“Three recent academic studies, though they differ in purpose and scope, all reach the conclusion that extremely high levels of governmental indebtedness diminish economic growth. In other words, deficit spending should not be called “stimulus” as is the overwhelming tendency by the media and many economic writers. While government spending may have been linked to the concept of economic stimulus in distant periods, such an assertion is unwarranted, and blatantly wrong in present circumstances. While officials argue that governmental action is required for political reasons and public anxiety, governments would be better off to admit that traditional tools only serve to compound existing problems.”

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