Cuts and Economics

Maybe because I'm from a country that has a debt GDP ratio of 200%, George Osborne insisting Britain (the ratio is a little above 70%) is at "the brink of bankruptcy" has always sounded a bit funny. Anyway, as everyone knows, he announced big budget cuts today. (by the way the chap is the Scottish Danny, Treasury secretary, not George)

I don't have a strong opinion about the likely consequences of the cuts (sorry!). But I find it amusing that what those Tory/LibDem politicians say sounds exactly like what a good third year economics undergrad would say about fiscal policy in his/her homework essay. It strikes me that those politicians do believe strongly in textbook economics and actually use it as THE justification for the cuts. I think, the politicians are, or must have been, good economics students (e.g. Danny and David were indeed PPEists: I don't know whether they did economics in their second and third years though).

On the other hand, I guess their teachers (we academic economists) have been less enthusiastic, perhaps because we tend to believe that the actual fiscal policy doesn't actually work like that. At least I used to think that, in any country, even when a big spending cut is deemed appropriate in theory, politicians favour tax increase or do nothing in practice. For instance, a large decrease in "G" seemed to me like a mere intellectual exercise, rather than anything practical.

So, to me, what the UK government is trying to do is a big policy experiment to test whether undergrad macroeconomics actually works in reality. The point is that, rather surprisingly, it doesn't seem to have been tested before. If it works, then I'll definitely have more faith in what I teach.