Budget 2010: Likelihood of Success?
Séan Rickard – June 2010
Steve Macaulay The 2010 emergency budget has provoked many questions and not a little
controversy. The kind of questions that are being asked are: were these cuts
inevitable, or weren’t they? Are they progressive, or regressive? Are the
cuts that are being proposed too quick or too slow?
Now to help us answer some of these questions we are joined today by Séan
Rickard. Now, Séan, you are an economist, you have got plenty of
experience of dealing with such issues as these; what are your views on the
situation?
Séan Rickard
Well, I think in answer to your three questions there, it is inevitable up to a
point; we certainly need to reduce the amount of debt, but there is no doubt
that this government has gone further than they needed to. There is an
ideological element here; they are determined to shift the balance of
spending from the government towards the private sector and they are
taking advantage of the current crisis to go further than they need to.
Is it progressive or regressive? It depends who it really hits and as people
examine it in more detail now, they are beginning to think it is perhaps more
regressive than they thought at first.
I think the central point here really is that if it is going to work, what has got
to happen is that there has got to be the take up by the private sector of the
slack that is going to be created by government cuts in expenditure – very
large cuts in expenditure, incidentally, the size of which we have never seen
in the post War period. No previous government has dared to suggest the
sort of cuts that they are talking about.
But if we are going to examine how successful this is going to be, I think this
little diagram will help.
GDP: the path of recovery…
Index
Historical trend
150
140
A
B
Gross Domestic
Product
130
C
120
Alternative
recovery
scenarios
110
The recession
100
End of recession?
90
2000
2002
2004
2006
2008
2010
2012
Knowledge Interchange Online © Cranfield University (June 2010)
2014
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Séan Rickard
Essentially you can see in this diagram how the economy fell off a cliff,
literally. We faced one of the deepest recessions in the post War period and
the government really had no choice but to spend an awful lot of money to
stop that turning into a slump.
The question now is, how are we going to recover? Traditionally we would
have followed line A. We would have been back to our historical rate of
growth within about three or four years and during that period we would
have seen faster than average growth and that takes down the
unemployment, allows people to spend more money. This time that is not a
possibility. Because the government is going to be taking money out of the
economy, at the very best we are going to follow the path of B. We are going
to perhaps return to the long term underlying rate of growth, but we will not
catch up to where we have been. So the economy is going to lose a very
large amount of money and that means that probably any reduction in
unemployment is going to be slower in coming, any return to the welfare, to
the wellbeing of people is going to be much slower in arriving and even
worse, there is a possibility that with the government taking so much money
out of the economy, we will get a so-called double dip recession. We will
actually see us slipping back into recession before we start to recover. So the
stakes are very high.
SM
So what is your estimate of the likelihood of success of the strategy that
the government is adopting?
SR
Well it would be very easy to say it doesn’t look very promising at all.
But one is always being shocked; I remember back in the early 1980s
many economists didn’t believe that what Margaret Thatcher was
proposing would work – and after a fashion it did work.
But what has got to happen is that if the slack is to be taken up by the
private sector they really have to invest a great deal more than they have
been and we start off with a huge reduction in investment at the
moment and we are going to have to rely on selling a lot more goods and
services to other parts of the world than we import. And again, we have
been developing a large trade deficit over recent years, so we are going
to have to actually turnaround completely our behaviour.
SM
And your estimate of the likelihood of that succeeding is what?
SR
Well, I would have thought in terms of probability it is only about 60%
probability. What we have seen is a huge reduction in the value of the
pound – 20% down on average. That should be giving our exports a
boost; to date, it hasn’t materialised. Now that might be just because
our companies are taking profits rather than going for market share.
But that in itself is not very helpful because it suggests they are not really
focused on expanding their export markets.
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Séan Rickard
In a time of recession, of course, when there is spare capacity, when
there is doubt about the demand coming from consumers, there is
obviously going to be doubts about investing in extra productive
capacity. So you see, the government really are crossing their fingers
and praying that their ideology is right.
SM
Séan, thank you very much indeed.
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