OECD agrees with the British public that sorting out the public finances is the right thing to do

OECD agrees with the British public that sorting out the public finances is the right thing to do
Matthew Sinclair  •  Economics 101  •  Wednesday 16 March 2011

The OECD has released a new report on the state of the British economy.  It has a number of interesting recommendations – for example more autonomy for schools to improve performance – but the central message is that the fiscal consolidation is right and necessary.  Spending cuts planned are vital to build a sustainable economic recovery.

Bumper receipts from the booming financial sector obscured the scale of the problem before the financial crisis, but it is now very clear that a substantial change is needed.  While the unions and some politicians are still trying to mount an irresponsible opposition insisting no cuts are necessary, they have lost the argument.   The Guardian’s poll on Monday revealed that the public support spending cuts too.  The real debate now is about how we can best manage that process.

“The UK economy emerged from the 2008–09 recession with elevated public and private debt and high unemployment. Strong growth and macroeconomic stability in the run–up to the crisis had hidden a build–up of significant imbalances, influenced by overreliance on debt–finance and the financial sector, and booming asset prices. These imbalances need to be addressed to ensure a sustainable and balanced recovery. The government is pursuing a necessary and wide ranging programme of fiscal consolidation and structural reforms aimed at achieving stronger growth and a rebalancing of the
economy over time.

A broad based recovery started in end–2009, but faces significant headwinds during 2011, which can be mitigated by monetary policy remaining supportive. The planned fiscal consolidation is needed to ensure that the fiscal position will be sustainable over time. Nonetheless, it adds to the headwinds from weak real income growth and a fading rebound in global trade. Monetary policy should hence remain expansionary, even if headline inflation is significantly above target, to support the recovery.”

Their argument for a permanent fiscal framework is one important area where the Government could improve.  In the book How to Cut Public Spending (and Still Win an Election) we looked at how expenditure targets could help to deliver a more effective fiscal consolidation.  They should still be put in place.

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