Stiglitz hits out at ‘mindless deficit reduction’

10 Feb 10
Strong economic recovery in the UK will depend on public sector investment, not on deficit reduction plans, a leading economist has warned
By Lucy Phillips

10 February 2010

Strong economic recovery in the UK will depend on public sector investment, not on deficit reduction plans, a leading economist has warned.

Speaking today at CIPFA’s World-Class Performance Symposium, Professor Joseph Stiglitz, a former World Bank chief economist, said ‘mindless deficit reduction’ would lead to greater and longer-lasting national debt.

‘I’m particularly concerned with the debate going on in the US and Europe demanding they engage in a large deficit reduction. Deficit reduction is short-sighted and reflects the lack of understanding of financial markets,’ the Nobel prize-winning economist said.

His comments came on the same day that eurozone countries were expecting to reach a deal to help Greece tackle its huge budget deficit and avoid a sovereign default. The country was in the midst of a nationwide one-day strike by public sector workers over austerity measures being introduced by the government to tackle its debt. 

The controversial economist, who is a professor at New York’s Columbia University and chair of the UN commission set up to tackle the global financial crisis, said neither the US nor Europe would have a quick or robust recovery from recession. He applauded the quick stimulus action taken by governments to ‘bring back the global economy from the brink’ but said the subsequent focus on slashing national debt was ‘totally misplaced’.

Instead, governments should divert their efforts to increasing spending and productivity in the public sector, Stiglitz said. He recommended investing in areas such as education and infrastructure, saying: ‘What matters is not the deficit but the balance sheet.... If we spend the money on investment the economy will grow and we will get more tax revenues.’ Long-term national debt would be lower, he added, provided there was an average return on investment of 5%–6%, although past experience indicated it would be much higher. 

Stiglitz also warned against bailing out the banks any further, saying it would result in slower recovery and higher unemployment. He had earlier condemned the banks for bringing about the financial crisis, failing to give any return for their state support and consequently criticising governments for their debt. ‘We have all had to pay the price of these very large mistakes,’ he added.

Greater reforms to the banking system were needed than those proposed by US President Barack Obama, dubbed ‘radical’ by commentators, according to Stiglitz. He called for greater transparency and accountability and said questions over whether banks were ‘too inter-twined to fail’ should be tackled in addition to the current debate over whether they were ‘too big to fail’.

Jon Thompson, head of the Government Finance Profession in the Treasury, later told delegates that reducing the public deficit would be one of the issues upon which the general election was ‘formed’.

Addressing the public sector ‘spending challenge’ would involve cutting back on lower priority programmes and reviewing infrastructure projects, he said. ‘For finance colleagues, getting a place at the table and demonstrating leadership is really important here,’ he added.

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