UK's spending cuts may send nation 'back into recession'
By Robert Barr |
July 1, 2010, Thursday
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Print Edition
Print Edition
BRITAIN could be pushed back into recession by the government's austerity moves and slow recovery in key export markets, a member of the Bank of England's rate-setting Monetary Policy Committee said yesterday.
Adam Posen said he sees the British economy is poised between a weak recovery and a drop back into recession, but believes current monetary policy and sustained growth outside Europe can keep Britain out of recession.
If that proves to be the case, Posen said Britain would continue to have above-target inflation. He added that once a recovery is secure he would support a rise in the base rate from its all-time low of half a percent.
The new coalition government in Britain has recently announced further cuts in spending - 25 percent for most departments - and some tax increases in response to last year's record budget deficit.
The Guardian newspaper yesterday reported that a Treasury document forecast that as many as 120,000 jobs could be lost from the public sector and 140,000 from the private sector in each of the next five years.
"I have laid awake a number of nights recently trying to figure out how big is the risk that the major economies are repeating the mistake of the US in 1937 - or in milder form Japan in 1997 - by tightening fiscal policy too much, too rapidly," Posen said in a speech to the Society of Business Economists in London.
That issue has divided the G20 major industrial and developing nations, with United States President Barack Obama warning against killing recovery by retrenching too rapidly. At the group's recent summit in Canada, G20 nations committed developed countries to cutting deficits in half by 2013 and stabilizing total debt burdens by 2016.
But they also left room for countries who can afford it to continue economic stimulus.
"For the UK specifically, unlike the US or Japan then, there may simply be no choice the structural budget deficit is now too large, the state share of the economy has become too high, and the risk of savings leaving our markets remains very small but still too great," Posen said.
"In my opinion, that leaves the UK economy tentatively in the recovery state, but still subject to switching back into the recession state," he said.
Posen voted with the majority of the Monetary Policy Committee this month to hold the base rate at 0.5 percent, but member Andrew Sentance advocated a rise to 0.75 percent.
Adam Posen said he sees the British economy is poised between a weak recovery and a drop back into recession, but believes current monetary policy and sustained growth outside Europe can keep Britain out of recession.
If that proves to be the case, Posen said Britain would continue to have above-target inflation. He added that once a recovery is secure he would support a rise in the base rate from its all-time low of half a percent.
The new coalition government in Britain has recently announced further cuts in spending - 25 percent for most departments - and some tax increases in response to last year's record budget deficit.
The Guardian newspaper yesterday reported that a Treasury document forecast that as many as 120,000 jobs could be lost from the public sector and 140,000 from the private sector in each of the next five years.
"I have laid awake a number of nights recently trying to figure out how big is the risk that the major economies are repeating the mistake of the US in 1937 - or in milder form Japan in 1997 - by tightening fiscal policy too much, too rapidly," Posen said in a speech to the Society of Business Economists in London.
That issue has divided the G20 major industrial and developing nations, with United States President Barack Obama warning against killing recovery by retrenching too rapidly. At the group's recent summit in Canada, G20 nations committed developed countries to cutting deficits in half by 2013 and stabilizing total debt burdens by 2016.
But they also left room for countries who can afford it to continue economic stimulus.
"For the UK specifically, unlike the US or Japan then, there may simply be no choice the structural budget deficit is now too large, the state share of the economy has become too high, and the risk of savings leaving our markets remains very small but still too great," Posen said.
"In my opinion, that leaves the UK economy tentatively in the recovery state, but still subject to switching back into the recession state," he said.
Posen voted with the majority of the Monetary Policy Committee this month to hold the base rate at 0.5 percent, but member Andrew Sentance advocated a rise to 0.75 percent.
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