Tuesday, June 7, 2011

Economic myths and realities: (UK) FALSE ECONOMY - Why cuts are the wrong cure

THE WRONG CURE

Economic myths and realities


Our guide to common economic myths – and the essential articles and blog posts that debunk them. Let us know if we've missed anything.
MYTH 1: The government's deep, rapid spending cuts are the best (or only) way to shrink the deficit.
REALITY: Cameron's government inherited a recovering economy and falling deficit. Since then the economy has stagnated and the deficit has grown.
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MYTH 2: Osborne has saved us from the same fate as Ireland, Portugal and Greece.
REALITY: Britain wasn't in the same position as Ireland, Portugal or Greece to start with. But by mimicking their failed austerity policies, Osborne is taking us closer to economic disaster.
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MYTH 3: The cuts aren’t that bad.
REALITY: Pro-cuts commentators fiddle the figures by adding the "costs of recession" – extra debt interest and dole payments – onto public service spending. Strip out the former and it's clear the latter is being cut savagely. 
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MYTH 4: Government policies are promoting growth.
REALITY: Official figures show the government has strangled a tentative recovery. GDP forecasts have been repeatedly revised down, and the government's "pro-growth" initiatives are feeble.
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MYTH 5: The government is rebalancing the economy and will make us less dependent on debt.
REALITY: Osborne claims to be against high levels of both public and private debt. But official forecasts for increased growth rely on us taking on much more personal debt.
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MYTH 6: Increased exports will compensate for cuts.
REALITY: "The reliance on trade to boost the economy has been a persistent feature of UK forecasts for the past decade – and they have been persistently wrong.” – Financial Times.
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MYTH 7: The government is sorting out the banks with the same urgency that it is cutting the public sector.
REALITY: Osborne's bark has proved much worse than his bite when it comes to clamping down on obscene bonuses, or structural reform to avoid another banking crash.
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MYTH 8: The current crisis is the result of the last government's overspending.
REALITY: As the graph in our "How big is the deficit?" section shows, it was the recession – and the resulting collapse in tax receipts – that caused the deficit to soar. 
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MYTH 9: Britain's public debt is exceptionally high – historically and in comparison with other countries.
REALITY: Neither claim is true, as illustrated by our “How big is the problem?” graphs and the links below.
MYTH 10: The theory of "expansionary fiscal contraction" explains how cuts will help the economy grow.
REALITY: Even the IMF – in a comprehensive study – found the evidence for this threadbare.
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MYTH 11: The way to promote growth is to cut workers' pay and conditions.
REALITY: Analysts from across the political spectrum agree that falling wages for those on low-to-middle incomes helped cause the crash.
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MYTH 12: Spending cuts are less harmful to the economy than tax rises.
REALITY: Official figures show spending cuts have a larger impact on GDP than tax rises. They also show policies that take money away from lower earners hit the economy harder than those that target high earners.
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MYTH 13: Corporation tax cuts promote growth.
REALITY: If Osborne was so concerned to cut the deficit he wouldn't be reducing tax receipts by cutting corporation tax. There may be arguments for other tax cuts – like VAT – but research shows only a weak relationship between corporation tax and growth.
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MYTH 14: The 50p tax rate on earnings over £150,000 will lead to a lower tax take for the Treasury.
REALITY: Advocates of this argument assume a substantial number of high-rate taxpayers will leave the UK due to this tax. There is no evidence for this.
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MYTH 15: Global opinion agrees with Nick (and George and Dave).
REALITY: Many other governments and international organisations – even conservative ones – balk at the UK's dash for austerity.
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MYTH 16: We can't blame the government for our stagnating economy – other countries are in the same boat.
REALITY: Britain has slid down the global growth table and now languishes near the bottom.
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MYTH 17: We’re all in this together.
REALITY: Our section on "How cuts will make Britain more unfair" summarises the unequal effect of the cuts, with more detail provided by the links below.
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