Friday, February 19, 2010
Economists on the rampage as sales plunge
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

Last weekend's letter to The Sunday Times by 20 leading economists appears to have had the effect of waking up every economist in the land, and beyond. In response to the letter organised by Professor Tim Besley calling for a more credible deficit reduction plan, beginning in 2010-11, two letters appear in the Financial Times today, led by Lord Skidelsky and Lord Layard, saying in effect that to start cutting too soon would be disastrous.

This week's data have pointed both ways. The public finances were in a worse state in January than expected, while retail sales slumped by 1.2% last month (1.8% including petrol sales), giving succour to the double-dippers. The sales figures, of course, were hugely affected by the January snows so should be taken with a pinch of salt. As Mervyn King once said, the true meaning of Christmas is often not clear until Easter.

As for the letters, an ancient, quasi-religious war has exploded into the open, buried for years and brought back into life by the crisis. I don't know how familiar the letter-signers are with the details of Britain's public finances and the government's plans. I suspect not very much, or else they would know that this is a phoney war.

Let us be clear: the government's plans are for a fiscal tightening beginning in 2010-11, including the start of a sharp fall in capital spending and tax increases. The Tories, at the margin, would go a little further in 2010-11 if they could, but not hugely.

The Layard letter does at least acknowledge that 1% spending cuts are planned for 2010-11, though tax increases apparently don't matter, and is the more serious contribution. As for the Skidelsky letter, I doubt his beloved Lord Keynes would have signed up to it.

Why is the government's plan to halve the deficit not credible? Mainly because for all Alistair Darling's sincerity, every time Gordon Brown opens his mouth he gives the impression that he will backslide on the plan - even now the talk is of spending the proceeds of lower than expected unemployment - if he possibly can. The Treasury needs to find a way of shutting him up.