Much better to keep business happy on a fantasy, for sure.

Does this survey show that business is the leader of growth forecasts that are influenced heavily by government spending, or that business has been believing in an economic situation that has led them to predict growth that is artificially higher than it could possibly be?

In either case, aren’t we better off by being realistic than toying with the idea of inflating another bubble?

What exactly is this government doing (so far) that Labour hadn’t also committed to do, other than the relatively small 6bn cut this year?

CJCJCJCJCJCJCJCJCJ

It is planning to do more than that in the future, and most businesses plan for the future, so intentions are obviously more important. This is particularly important in areas of the UK where the public sector is an important employer – as job losses in the area will have an adverse effect on local consumption. For example if I ran a business outside of the South East, I’d be very worried about the disposable incomes of my customers going down significantly, and as a result I’d be wary of taking on more staff or placing large orders with suppliers.

I really should go and check out the actual survey data rather than the press release reported by the BBC, but is there a dange here that we’re seeing:

Business confidence drops in May -> there is a new government in May ->because there is a new government in May, business confidence has dropped.

Which is an obvious fallacy. I’m sure that the data is all weighted properly etc., but…

…it is quite possible that BDO have sampled mainly large firms (looks better for the stats) – who are most likely to look overseas for their business. The other thing that happened in May is that Greece really deteriorated quite sharply (link below), which may also have knocked business confidence a smidgen.

Just saying…

http://www.eubusiness.com/news-eu/greece-finance.4j0/

Fiscal consolidation is also likely to have expansionary effects: http://www.marginalrevolution.com/marginalrevolution/2010/06/from-the-comments.html

So for all we know, the drop in confidence could have been much larger if the Government hadn’t committed to the cuts now.

Overiding this though is that expectations (even those of businesses) are far from rational, particularly if those making the predictions have swallowed all that Keynsian bullshit we’ve had the for the last 50 years. So in the long run, we are still better off sorting out the fundamentals of the economy than playing to the crowd on short term growth preductions.

By his own account, Darling as Chancellor made plans to halve the deficit in 4 years but that was based on an intention to raise National Insurance rates from April 2011 to draw in about £6 billion extra revenue. The Conservatives have reversed that and they will therefore need to find extra revenues or spending cuts to make up. This is one reason many economists are reportedly now forecasting a rise in VAT for the budget scheduled for 22 June.

Another new factor in the situation and previously not anticipated is the weakness in the Eurozone economy – partly or mainly caused by public spending cuts and tax increases of Eurozone governments – and the appreciation of the Pound against the Euro (from 91 pence for a Euro in March to about 82 pence now), which will make it harder to sell goods and services into the Eurozone, while holidays in the Eurozone will be less expensive.

“Fiscal consolidation is also likely to have expansionary effects”

So the depression of the 1930s could have been avoided if only enough governments had been wise enough to cut public spending sufficiently deeply and hiked taxes sufficiently steeply?

Btw if the experiment with monetarism by the Thatcher government was so successful, why was the Medium Term Financial Strategy formally abandoned in the autumn of 1985? And why did the IMF come to this conclusion?

” …instability of monetary demand, especially in the context of supply shocks and declines in potential output growth, complicated the task of monetary authorities. As a result, during the 1980s most central banks – with some notable exceptions – either abandoned or downplayed the role of monetary targets.”
IMF World Economic Outlook, October 1996, p.106.

When the US Federal government acted in 1937 to curb its budget deficit, the US economy turned down.

Nick, just because sometimes fiscal contraction can be expansionary doesn’t mean it always is.

For example, can we export our way out? Will monetary policy ease? Will our currency depreciate (related to the first two). Will households pick up the slack.

No, frankly, those options aren’t available. It doesn’t matter in general what happens when you’re favourite policy is enacted, it matters about what happens in the given set of circumstances which we find ourselves in.

Oh bugger, I meant to link to this. I’ve just blogged this too. http://leftoutside.wordpress.com/2010/06/14/dave-nick-and-george-crushers-of-optimism-enemies-of-business/

“Nick, just because sometimes fiscal contraction can be expansionary doesn’t mean it always is.”

Other factors didn’t remain constant – the Pound depreciated in a big way and, importantly, inflation and inflationary expectations dropped.

For an extended analysis of the “fiscal consolidation” in Howe’s 1981 budget, try the analysis by Alec Cairncross in his book: The British Economy Since 1945.

The relevant sections can be (hopefully) retrieved by googling on “Cairncross budget 1981″ – without the quotation marks, of course – and selecting the top item relating to Google Books.

What is attributed to the downstream outcome of fiscal consolidation in the 1981 budget greatly depended on the coincidental depreciation of the Pound. It’s intellectually dishonest to claim fiscal contraction boosted the economy when other important factors were coincidentally changing.

Btw Alec Cairncross had been appointed chief economic adviser in HM Treasury in 1961 by a Conservative government.

For comparison with current political debates on the extent of the fiscal squeeze needed to correct the structural deficit in Britain’s public finances, see these media reports from 3 February on assessments then by the IFS and the NIESR:
http://news.bbc.co.uk/1/hi/business/8494904.stm
http://www.guardian.co.uk/business/2010/feb/03/ifs-report-spending-cuts-tax-rises

The unexpected factor in the economic situation is the weakness in the Eurozone economy, which is bound to affect UK exports. Hitherto, additional exports have been regarded as the principal source of extra demand to make up for future public sector spending cuts in Britain. But note the fiscal measures being proposed in Germany, which is Britain’s main market in Europe:

“Drastic public spending cuts totalling more than €80bn ($96bn, £66bn) were unveiled by Angela Merkel, German chancellor, on Monday, combined with up to 15,000 job cuts in the public sector, as part of a sweeping austerity package. New taxes will also be imposed on air travel and the nuclear power industry, and some form of financial transactions tax is planned, in addition to a banking levy already agreed by the German government.”
http://www.ft.com/cms/s/0/0f9548c8-7256-11df-9f82-00144feabdc0.html?ftcamp=rss

Auster is a genius and absolutely correct. When you make drastic cuts, people start to panic and spend less. Less spending = even worsening economy = vicious circle. Simple really. Why is Cameron not getting it?

@12: “Why is Cameron not getting it?”

Your analysis – as is mine – is basically keynesian macroeconomics and swathes of the Conservative Party absolutely reject Keynes. Try this commentary from John Kay in the FT:

“The macroeconomics taught in advanced economics today is largely based on analysis labelled dynamic stochastic general equilibrium. The unappealing title gives the game away: the theorists are mostly talking to themselves. Their theories proved virtually useless in anticipating the crisis, analysing its development and recommending measures to deal with it.

“Recent economic policy debates have not only largely ignored DSGE, but have also been remarkably similar to the economic policy debates of the 1930s, although they have been resolved differently. The economists quoted most often are John Maynard Keynes and Hyman Minsky, both of whom are dead.”
http://www.ft.com/cms/s/0/19491372-472c-11df-b253-00144feab49a.html

Also, a huge chunk of the Conservative Party wants to cut public spending asap in order to cut direct taxes – recall recent arguments over the capital gains tax rate.

Having said all that, I believe that the HoC Public Accounts Committee in the last Parliament turned up with persuasive evidence of substantial waste and inefficiencies in public spending so there’s a good case for pruning but the timing is crucial if a double-dip recession or a stagnant economy are to be avoided.

Consider this:

“The National Health Service can make the £15bn to £20bn of savings needed during the next three years without damaging the quantity or quality of care – indeed while even improving the latter – according to David Nicholson, the NHS chief executive.”
http://www.ft.com/cms/s/0/6fba7dfe-e683-11de-98b1-00144feab49a.html

That says cuts in the annual NHS budget of c. £105 billion of around 15% can be made without damaging care, which is amazing. But then consider this finding of the ONS:

“The NHS has seen a year-on-year fall in productivity despite the billions of pounds of investment in the service, latest figures show. The data from the Office for National Statistics showed a fall of 2% a year from 2001 to 2005 across the UK.”
http://news.bbc.co.uk/1/hi/health/7610103.stm

Here’s what BDO’s Peter Hemington actually said (my emphases):

there is a significant risk that the rhetoric has begun to impact on business confidence, and fears of the economic impact of spending cuts may be causing businesses to rein back on growth plans.”

So, the germ of an idea an idea cautiously and tentatively advanced, duly qualified by the language of risk and possibility,
is relayed by the BBC and Sunny as a slam dunk case that Osborne is talking down the economy. If we can’t trust Sunny and the BBC to report stuff honestly, who can we trust?

The fact is that several, high-profile FT columnists have been expressing a series of warnings about the risks of a double-dip recession from early, steep cuts in public spending before growth of the economy is securely established and when the Eurozone economy is fragile.

George Osborne is manifestly unable to resist the temptation to rush into making daily announcements about how tough he is going to be on slashing public spending to save us all from the mess left by the previous government and the looming prospect where the finance markets resist buying UK government bonds.

With all that going on, it’s hardly surprising if there’s a loss of business confidence. The government – as well as many contributors here – are unable to focus on the question about what other spending is going to fill the gaps left when public spending is cut. And that is still a relevant and pressing question in the present context even if, as I believe, there are good reasons for concerns about waste and inefficiencies in public spending.

See in Wednesday’s FT Martin Wolf on: Why plans for early fiscal tightening carry global risks:
http://www.ft.com/cms/s/0/fc8d1dd4-78b6-11df-a312-00144feabdc0,s01=1.html