Financial Times: Future generations will curse us for cutting deficits in a slump.

[Better Believe It]

Future generations will curse us for cutting in a slump
By Robert Skidelsky and Michael Kennedy
Michael Kennedy is a former economic adviser at the Treasury. Lord Skidelsky is professor emeritus at Warwick University
July 27, 2010

In 1937 Keynes wrote: “The boom, not the slump, is the right time for austerity at the Treasury.” Jean-Claude Trichet, president of the European Central Bank, disagrees. Stripped of its jargon, his argument last Friday in the Financial Times is that fiscal retrenchment is needed to “consolidate recovery”. This has become the standard European – though not American – line. “Failure to address the deficit is the greatest danger we face,” said UK Treasury minister Lord Sassoon in the House of Lords on Monday, faithfully echoing the words of his master, chancellor George Osborne. But beyond vaguely referring to the need to restore “confidence”, none of the cutters can explain how reducing public spending when private spending is already depressed will “consolidate recovery”.

Any attempt to reduce it before a strong momentum to private sector recovery is established will make matters worse. Once the economy has started to grow, the deficit incurred during the recession will automatically shrink to a pre-recession level. Deliberate steps to eliminate the “structural” (ie non-recession induced) deficit should be postponed until the recovery is firmly entrenched. With the budget balanced, or even in surplus, at high employment, continued growth will steadily reduce the national debt as a percentage of gross domestic product. This is what happened after the second world war.

Contrary to a widespread view, the deficit does not impose a burden on future generations. There is no repayment burden because the government, unlike private individuals, can and normally does repay its maturing debts by borrowing again. (In the last resort, it can print money).

If, however, the public deficit is cut now, there will undoubtedly be a burden on both present and future generations. Income and profits will be lowered straight away; profits will fall, pension funds will be diminished, investment projects cancelled or postponed, schools not rebuilt – with the result that future generations will be worse off, having been deprived of assets they might otherwise have had.

Read the full article at:

http://www.ft.com/cms/s/0/307056f8-99ae-11df-a852-00144feab49a,dwp_uuid=32461f5e-94f3-11df-af3b-00144feab49a.html