Tuesday, 18 May 2010

Its time for a public sector recession

The UK’s budget deficit has received a lot of attention recently. However up to now, politicians have only spoken openly about what they will ring-fence, and not about what they will cut. The scale of the declines in public spending about to happen will probably take most of the country by surprise. The Financial Times has a superb budget balancing tool that brings home how difficult the decisions that have to be made really are.

In the run up to the election, the Labour party was right about one thing: the cuts will be a setback to the UK’s economic recovery. (They were wrong about something else: the cuts are not optional and cannot be put off.) The UK’s private sector has already had its recession: from 2008 to 2010 companies cut back on capital expenditure and stopped recruiting, causing a drop in the country’s output and a hike in unemployment (especially amongst the young). Throughout this period, though, the public sector kept spending and kept recruiting. Furthermore, a substantial chunk of the debt in the private sector was transferred to the public sector through the bank bailouts / nationalisations.

This action prevented a deeper recession. Unfortunately, the flip side is that we have a lot of pain to come. Rather than the “V shaped” recession we were hoping for, we are very much destined for a W-shaped one. Only this time round it will be the public sector that has to freeze its capital expenditure, and its new hiring, and, of course, its “unemployee” expenses.

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