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25 May 2010

The truth about those cuts . . .

Has anyone added in the costs of all the job losses?

By Mehdi Hasan

I’m amazed that the hidden costs of the Con-Dem (Lib-Con?) spending cuts have not been fully explored or analysed by business journalists, or the commentariat, so I was delighted to see this excellent letter in the Guardian today from two of the country’s top academic economists:

There were some key aspects of the Treasury announcement of public expenditure cuts, which were overlooked and on which Treasury ministers must be pressed (Report, 24 May). Two to which we draw attention are the effects on employment and on the budget deficit.

The effect of scrapping the child trust fund will have little effect on employment as the funds transferred to parents have to be saved, and not spent. But the other cuts will have effects on employment, and a “back of the envelope” calculation would suggest a loss of jobs running well into six figures. It surely behoves the government to provide some estimates of the effects (and then the subsequent rise in the payment of unemployment benefits).

The focus has been on “savings” of £6.2bn. This is presented as though the budget deficit will be reduced by a corresponding amount. This ignores that income and expenditures of public-sector and other workers are taxed, and the reduction of the budget deficit will then be considerably less than the often-quoted £6bn when those reductions in tax receipts are taken into account. Further allowance should be made for the “multiplier” effects of the reduction in public expenditure — that is the consequent reductions in employment as other forms of expenditure are further reduced — and the reduction in the budget deficit will be even smaller or perhaps non-existent. Much pain, little gain!

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