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Ruling circles in G20 spilt: Will public sector cuts push us into a second recession?

The move to cut public services has gained more speed.  Prime Minister Harper has now praised the (savage) cuts the new British government is proposing and has called it a model for the G20 (which subsequently agreed to pursue deficit reduction).  Harper, in effect, is joining  a growing movement in European counties to move away from the policy of public sector spending to stimulate the economy and towards a policy of public sector cuts to reduce government deficits.

Notably, other ruling circles believe that the world economy is still in danger of falling into a second  recession and that the private sector still needs a public sector stimulus.  Obama falls into this camp, but he is less and less able to deliver the goods, with more and more resistance in Congress.  More successfully, China is spending $123 billion to expand public health care insurance and its economy (like much of the rest of the developing world) is growing strongly.

How this will pay out is unclear, at least to this non-economist. 

But four points do seem apparent: [1] While we had a world united around a policy of economic stimulation through public sector spending, this is no longer true.  Instead, some countries continue to stimulate demand while others are sharply stifling demand by cutting public sector spending.  In short, the various national policies seem contradictory, at least at the moment. [2]   Government policy in the most highly developed countries is moving from stimulus to public sector spending cuts.  [3] While public sector stimulus spending went almost entirely on funding and reviving private business, it is public sector social services that are now being cut.  And that will mean less for working people. [4] While public sector spending helped private business come out of recession, the new, emerging policy of cuts introduces a new element, one with significant risk to the economy. Who is going to buy? Indeed, Paul Krugman, the economist and Nobel laureate, reviewing the G20 proposal to cut public spending concluded this yesterday on the New York Times web site: "We are now, I fear, in the early stages of a third depression."

The British Conservative-Liberal government introduced these cuts to the public sector after campaigning (just last month) on vaguely progressive platforms.  Now they sound like Margaret Thatcher on a bad day.  Policy is changing for Canadian governments too and this will likely have bad consequences for public sector services and working people. -- Doug

P.S. Paul Krugman's article can be found here.   Or, for a Canadian perspective on the threat to the economy of public sector cuts: "The Harper plan for global recession".  It's by James Laxer and was published by, a Canadian news commentary site that is pretty friendly to working people. -- D.


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