Oct 31

UK Think Tank Says Deficit Paranoia Increases Debt

A think tank in the UK has pointed out (as the IMF did in less vocal tones about Europe as a whole) that focusing on reducing government deficits is actually leading to greater debt.  The UK has taken an approach of tax increases and spending cuts to keep debt from going too high.  But the reduction in consumer spending from taxes and reduction in government spending has slowed economic growth, meaning that there is a smaller tax base from which to generate revenue.   The typical Keynesian picture seems vindicated: the government should spend in hard times, and save in good times.  Important to keep in mind here in the US when conservatives (and many Democrats too for that matter) talk about cutting government spending.   Granted Republicans won’t raise taxes, but as I have repeated over and over on this blog, they aren’t serious about cutting deficits either.  But for the sake of argument, let’s assume they did cut spending significantly.  Especially if the economy is in its current state, then that would slow down growth, decreasing the tax base…you get the idea.

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