By Michael Burke on Comment is Free
Britain’s deepest recession since the second world war has produced a highly distorted economy. So it is perhaps inevitable that there has been an extremely distorted debate about the how to deal with the consequences of it. Or at least one of the consequences, since the entire debate is focused on just one symptom of the crisis – the public sector deficit.
The economic distortion arises from the fact that the recession has been an investment-led slump. The British economy has contracted by £80bn and the majority of that has been a decline in investment, down £46bn. Individuals’ incomes and their spending patterns have been badly hit, but the 3.6% fall in consumption is completely overshadowed by the 19.3% fall in investment. Unless that lost investment is restored there will be a permanent lowering of the economy’s growth rate and a permanent loss to competitiveness.
The distortion to the economic debate is the fallacy that the deficit is not related to the decline in activity; that it is somehow a consequence of Gordon Brown’s reckless spending, or even a collective punishment for profligacy. Nothing could be further from the truth. Without a recession, a continued steady growth of taxation revenues on their long-run trend would have produced tax receipts this year £114bn higher than the Treasury currently expects – of a total current deficit of £128bn. Just asplunging investment is the driver of the recession, so falling taxes are responsible for the widening deficit. An economic policy aimed at boosting investment would not only revive the economy, it would also help to close the deficit.
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