Economy at risk from spending cuts, warns Koo
By
Richard Johnstone in Birmingham | 6 July 2011
A
leading economist has warned the UK government that cutting the deficit risks stalling
economic growth.
Richard
Koo, the chief economist of Nomura Research Institute, told the CIPFA
conference in Birmingham this morning that Britain, Europe and the US face a
'balance sheet recession' – where individuals and private sector companies pay
down debt incurred before the recession in 2008/09.
He
said the UK is ‘at the entry point’ when companies won’t borrow, even when
interest rates are close to zero, because they are focused on reducing debt.
Koo,
an expert on the Japanese economic and banking problems between 1990 and 2005,
told delegates that these same problems happened in Japan during the 1990s. The
lesson from Japan was that, due to the lack of demand in the private sector,
the government needed to keep spending to maintain economic growth until the
private sector is ready to borrow again.
He
told the conference that Japanese government spending had helped maintain
growth, but added that, at 7.3% of gross domestic product, the UK government’s
economic stimulus was not enough to cover for the savings of 8.7% of GDP that
the private sector had made. ‘In the UK I would argue that isn’t large enough
to stabilise the British economy.’
The
coalition government is reducing spending now. But the Japanese experience has
twice shown that if this happens before the private sector is willing to borrow
again, the ‘whole thing will come crashing down’, Koo warned.
There
were two bouts of negative growth, in 1997 and 2001, when the Japanese
government tried to cut the deficit. Five quarters of negative growth followed
and the Japanese budget deficit then increased overall because of the need to
mitigate the impact of this crash.
Koo
said this should stand as a warning to ‘all the capitals in the world’ that are
debating when to cut their deficit.
‘The point is that if you are in this type of
recession, which happens only after the busting of a nationwide asset bubble
financed by debt, the private sector decides to minimise debt rather than
maximise profits. If the government doesn't take the action to keep the
situation from collapsing, then you have larger problems going forward.’
Asked from the floor about ‘Japan
exceptionalism’ – that the country is unique in being able to find domestic
buyers for government bonds – Koo said: ‘The UK is no longer a low-savings
country that has to rely on Chinese or Arab countries to buy these bonds. UK
institutional investors realise that at the end of the day you have to buy
these bonds or you have to move the money abroad.’
To view Richard Koo's presentation from this session click here
