Oxford Economics, an Oxford-based consultancy, has challenged the coalition government’s commitment to implementing spending cuts. The consultancy firm reported that the government budget deficit will fall naturally at a much faster rate than initially predicted, reducing the need for the austerity package.
The report focused on the output gap: the difference between Britain’s actual GDP and potential GDP. While the output gap was believed to be 1.8 per cent of GDP, Oxford Economics has estimated that it is in fact over twice as large, at 5 per cent. A larger output gap means more potential for economic growth.
The report comes just weeks after the chancellor George Osborne warned that another £25bn of spending cuts needed to be made after 2015. If true, the report would invalidate Mr Osborne’s arguments for the need to make further spending reductions.
Students remain divided on the issue of spending cuts. Jack Matthews commented in his capacity as OUCA President that, “Dealing with the deficit and debt is the only way to return Britain to a strong economy. For the benefit of hardworking people everywhere, it is crucial that the government stick to their long-term economic plan.”
OULC Co-Chair Dan Turner responded, “Since the general election it has been clear that the government has been motivated by an antiquated and destructive ideology. By pushing for premature and severe cuts to capital spending, they caused an avoidable double-dip recession.”
Andrew Goodwin, senior economist at Oxford Economics and co-author of the IFS report, said, “The medicine of austerity could end up being applied in a dose higher than the patient actually needs.”
It is also possible that the output gap doesn’t imply anything about the level of spending cuts needed. Dr Ian Jewitt, an Economics fellow at Nuffield College, stated, “Whether they are right or wrong about the output gap, I’d have thought that issue was second order of importance for the necessity of cuts […] what happens to the world economy will be more important than the output gap.”
Dr Jewitt pointed out that other factors such as the Eurozone turmoil are crucial in determining British economic growth, and as such we cannot expect higher growth simply because there is an output gap.
One PPE finalist told Cherwell, “Everyone knows no one knows anything about macroeconomics. We just have to pretend that we do.”
