Cutting the deficit – who’s right? Tories or Labour

Labour says if you cut the deficit too soon through raising taxes and cutting spending you risk hurting the economy. The Tories say we need to cut the deficit urgently and it will not hurt a recovery. Who is right. Conventional wisdom is that Labour is right – just ask Keynes. But the economy has moved on since Keynes. Actually Treasury data shows that during the Thatcher and Major administrations fiscal tightening (cutting spending raising taxes) in fact coincided with strong economic growth. The reason is economic models show the more open an economy the less impact fiscal policy has – as you would expect. So if the rest of the world will recover anyway, you may as well cut the deficit and still get strong growth which itself will reduce the impact of raising taxes.

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