Government fiscal hindrance package could tip us into recession

Commenting on the new economic performance figures published by the Office for National Statistics today, the Chief Executive of Child Poverty Action Group, Alison Garnham, said:

“This is extremely worrying. A shrinking economy is especially bad news for the poorest families already reeling from the VAT increase and the rising cost of living. But things may get worse for all of us when the massive and unprecedented cuts to basic welfare benefits and social security start to bite.

“The £18 billion of cuts to basic welfare benefits and social security are a dangerous threat to the economy – a fiscal hindrance. They will harm not just struggling families, but also the businesses and services that rely on parents spending on food and clothing for their children, keeping them warm and healthy, and supporting their education.

“The £18bn cuts package for basic welfare benefits will cut finances to the bone for millions of families. You cannot cut that deep below poverty line incomes for so many households without a damaging economic impact. The danger now is that the massive package of basic welfare benefit cuts doesn’t just damage families, but keeps Britain in stagflation, or tips us into recession again. Failure to return to growth will increase the deficit, not decrease it.

“There is a strong evidence base for the importance to the economy of spending by low income households, as shown in work published by the IMF. Deficit reduction should be targeted where there is least damage to economic activity, but with their high 'economic multiplier' effect, cuts to basic welfare benefits are second only to cutting infrastructure investment for hindering growth. The Government’s failure to produce a comprehensive analysis of the cuts in these terms is a dangerous oversight that must now be addressed with urgency.”

 

Notes for editors

  • Fiscal hindrance is the converse of fiscal stimulus. In the same way as additional spends in areas with strong economic multiplier effects can stimulate economic growth, cuts in areas with strong economic multiplier effects will hinder growth.
  • The Government failed to produce a comprehensive analysis and comparison of spending cut and tax rise options and the relative economic multiplier consequences for different areas that could be target for cuts and tax rises. It has relied on a very small number crude economic multipliers across broad areas with a lack of targeted analysis. See Table C8 and paragraphs C54 to C60
  • A technical discussion of the economic multipliers associated with basic welfare investment can be found in the IMF published research note here. While it applies to stimulus action, it can also help suggest the expected economic consequences of converse action to stimulus when cuts are made: 
  • Poverty the Facts For up-to-date background facts and stats on UK poverty, visit: www.cpag.org.uk/povertyfacts/
  • CPAG is the leading charity campaigning for the abolition of child poverty in the UK and for a better deal for low-income families and children.
  • CPAG is one of over 150 member organisations of the Campaign to End Child Poverty, campaigning for public and political commitment to ensure the goals of halving child poverty by 2010 and ending child poverty by 2020 are met.

For further information please contact:
Tim Nichols
CPAG Press Officer
Tel. 020 7812 5216 or 07816 909302 
tnichols@cpag.org.uk