We should be Focussing on Jobs not Deficits says leading Economist (Bournemouth Liberal Democrats)

Bournemouth Liberal Democrats <contact.us@bournemouth-libdems.org.uk>

We should be Focussing on Jobs not Deficits says leading Economist

January 4, 2012 3:24 PM
By Michael Chizlett

The Conservatives continually fight for larger and more damaging austerity measures despite the fact that the effect this has on GDP growth and by extension tax revenues means that they're not reducing the deficit and doing huge social damage at the same time.

The focus on deficits is based on the idea that any minute investors are going to lose confidence in our ability to borrow and send us into a downwards spiralling debt crisis like the ones seen in Greece, Portugal, Spain and Italy. Yet Nobel Prize winnning economist Paul Krugman disagrees with this assesment pointing out that our debt/GDP ratio is low by historical standards and our bond yield rate is amongest the lowest in the world:

See Paul Krugman's Blog Post: http://krugman.blogs.nytimes.com/2011/12/04/british-debt-history/

Further Krugman argues that the true reason why there is a debt crisis in Europe is not fiscal irresponsibility in Southern European states, many of the countries now on the precipice (Spain and Ireland) actually had budget surpluses going into the economic crisis, but it is the inability of the European Central Bank to print more money and act as a lender of last resort which has caused an increased perception of risk and increased bond yields. In the same token it is not David Cameron's fiscal austerity that is saving the UK from the ire of the bond markets but the fact that the Bank of England will always be there to buy UK government debt should things get hairy. As evidence Krugman submits that all stable western countries have seen the same reduction in bond yields regardless of their budget deficits, their debt/GDP ratio, or long term growth prospects. Below is a graph of bond yields for the US, Japan, Sweden and the UK.

Bond Yields - Developed Countries

Notice particularly that Japan has yield rates of below 1% even though they have a debt/GDP ratio of over 200%. Notice also how the US and UK rates are almost identical despite the US having a $1 trillion budget deficit that is only forecast to get larger and a debt/GDP ratio of 100%. The UK has a debt/GDP ratio of a meagre 62.8% (ONS stats November 2011). Every time that Cameron takes credit for preventing a debt crisis he is hoping that we don't realise that the same thing has been happening to every non-euro developed country in the world.