Thursday, September 27, 2012

You can't spend your way out of a recession!

The reason we're currently in austerity mode is due to the current mantra of "You can't spend your way out of a recession". On the face of it this seems logical - you can't clear debt by borrowing more and that would normally be correct, except why are we currently in recession?

The flow of currency has stalled. Businesses can't get loans; they can't increase wages, people stop spending money. Businesses have to cut back or increase prices; people have less money to spend so they spend less. It's a viscous circle.

Should the government be spending money? Normally this is the time they add infrastructure etc. However this time around it's the weary argument that "Hey if simply spending money on things like buildings would jump-start the economy than the government could just build something then knock it down then build it again" then the people saying this laugh and leave it at that.

However again the reason we're in this mess is due to the stalled currency, paying to build superfluous buildings and then paying for someone to knock them down would in fact put money back into the system; of course it would be better to build something we need and not knock it down.

Our government has decided to go with the austerity route instead, reducing the amount of money the government spends. Surprisingly this could be a better long-term solution. In theory if the government is spending less then it needs to collect less in taxes from the populace. This leaves them with more money, which they'll spend; thus pulling us out of recession.

Except we don't seem to have got to that last bit yet. There's been some minor tinkering with the personal allowances, but VAT is still at 20%; council tax is supposed to go up; and the exemption rates for businesses are still set at a miserly low. At the same time food prices are increasing due to various economic and meteorological occurrences; and energy prices are also on the rise  So we still have less money to spend while at the same time the government is spending less money than normal to compensate.

Hopefully this might just be short-term pain for long-term gain, but if we're not careful we may fall too far to pull ourselves back up.