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It’s official: spending cuts harm the economy more than tax rises

Whichever model you use, spending cuts – especially those that bash the poor – slow the economy more than tax rises.

Economists use something called the fiscal multiplier to assess how changes in government spending and taxes will affect the wider economy.

The concept is quite straightforward – the multiplier shows how much a £1 change in a certain policy will change GDP (or national income). So if a particular type of government spending has a multiplier of 1.0, then increasing that spending by £1 should also increase GDP by £1. If the multiplier is 1.5, then a £1 increase in that type of spending will raise GDP by £1.50p. Conversely if the multiplier is only 0.5, than a £1 increase in that type of spending will only increase GDP by 50p.

Whilst such multiplier numbers will always be a subject to some uncertainty, they provide a good framework for thinking about how to reduce the deficit whilst minimising the hit to the wider economy.

Whether one uses the multipliers as estimated by George Osborne’s own Office of Budgetary Responsibility (page 96, pdf), those of the non-partisan US Congressional Budget Office (pdf), those of the IMF (page 35, pdf), or those estimated by credit ratings agency Moodys (page 3, pdf), two important trends are clear.

This basic framework suggests George Osborne’s economics are doubly dangerous – not only is he planning close the deficit mainly through sending cuts rather than tax rises, but he is also planning on disproportionally hitting low earners through cuts to benefits.

Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.


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