By Tash Shifrin
25 June 2009
The global recession is following "with almost mathematical precision" the pattern of the Great Depression, a leading economist has warned.
Willem Buiter, professor of European political economy at the London School of Economics, told CIPFA delegates yesterday that the global financial crisis had been "the most serious" since the 1930s.
Buiter, formerly a member of the Bank of England"s monetary policy committee and chief economist at the European Bank for Reconstruction and Development, joked he had seen green shoots - "in my salad".
History showed that where a contraction in the economy followed a financial crisis, it was "deeper and longer than regular recessions", he said.
"Government debt explodes when recession follows a financial crisis," he added.
Buiter told CIPFA delegates that government deficits of more than 12% of gross domestic product were usually seen in economies characterised as "banana republics", warning: "We're going to see [that] here and in the US for the next year or so."
The UK"s soaring debt figures were "not primarily the cost of recapitalising the banks... by far the largest share is due to the collapse of government revenues", he added.
The Treasury"s tax receipts had been hit by plummeting profits in the financial sector and loss of revenues from capital gains tax and stamp duty because of the decline of the housing sector.
He told delegates: "The buoyancy of taxes... is going to be permanently lower."
Buiter also predicted that the public sector would play a greater role in future because of "manifest market failure". This would not bring greater public spending, while tax rises would be needed "simply to meet the [government] debt".
But the "regulatory state" would be strengthened and there would be "more state ownership, especially in the financial sector".
This would highlight the "bond between private and public finance", Buiter suggested.
