Policy Research in Macroeconomics

GDP figures: the verdict

 By Michael Burke

‘Growth is now economic stagnation’ – First posted in the Guardian CiF.

The 0.5% rise in GDP is hardly any rebound from the same contraction in the economy in the previous quarter. Government policy has turned 2.8% growth into economic stagnation.

Zero growth over the latest six months clearly reflects the initial impact of the cuts. For example, construction is now in a “double-dip” recession – two quarters of negative growth having expanded in the middle of 2010. That prior expansion was led by the government’s construction investment, reflecting the impact of Labour’s previous efforts to stimulate the economy. As a result, the economy grew 2.8% in the previous 12 months.

The Tory-led government has thrown that investment abruptly into reverse. This directly subtracts from growth but it also further discourages the private sector from making its own investments. The result is a downward spiral of activity, which will lead to falling employment and lower tax revenues, undermining the idea that this is at all necessary to reduce the deficit. As in other countries where these policies have already been tried and failed, the deficit will widen as a result.

These are only the first effects of government policy. VAT rose in the first quarter of the year but none of the main spending cuts begin to take effect until this quarter. The question posed for the government – and any Labour advocates of slower cuts – is this: if a fiscal contraction of £9.4bn leads to stagnation, what will be the effect of the planned £41bn tightening over the next 12 months?

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