From the TUC

We still need government spending

28 Sep 2010, by in Economics

Charles Bean’s interview with Channel 4’s Faisal Islam has attracted a lot of attention for what he said about savers and shoppers. The Bank’s Deputy Governor said that interest rates had been held at 0.5 per cent for 18 months to encourage people to spend more and thus boost demand. He felt he had to apologise to savers for the low rates, but also warned them that they shouldn’t “expect to be able to live just off their income.”

But there are implications for the government too. Families and businesses are cutting back because we can all see the tough times ahead – no-one wants to be coping with higher debts if they are likely to be hard up. People are afraid that this is what the future will be like because they can see the cuts hitting their own incomes – either directly, through lower benefits or if they work in the public sector, or indirectly as demand falls. So they’re not being stupid.

But the Bank of England can’t do much more to encourage them. Interest rates can’t be cut much further and quantitative easing seems to be a limited tool. Exports have done well this year, but continued growth will depend on demand in other countries that are also retrenching.

Only the government can create sufficient demand. That’s my answer to the speech Mr Bean’s boss gave at the TUC’s annual conference. Yes, Mr King is right, if you’re talking about generations – never addressing the deficit would short-change our children. But the decisions that have to be made now are about a much shorter time scale – and accepting a higher level of debt over the short-term is the most sensible option.

One Response to We still need government spending

  1. Hal (GT)
    Sep 28th 2010, 7:06 pm

    “Only the government can create sufficient demand”? Are you serious? My suggestion, buy some gold with the savings. Even the central banks are doing it.