Friday, July 29, 2011

Surprise in Britain: Contractionary Fiscal Policy Leads to Contracting the Economy

The Economics of Connect the Dots

The Conservative party in England, in a coalition government which they control took office and pledged to reduce the budget deficit by a series of large spending cuts and tax increases.  The results so far, not so good.

British GDP grew .2% in the 2nd quarter over the first quarter for 2011.

UK GDP growthIn spite of growth of just 0.2 per cent, the chancellor insisted he would stick to his tough deficit reduction plan and that Britain was a “safe haven in the storm” that was battering other European economies.

The U.S. is about to embark on a similar policy (well, without the tax increases, we're Americans, we don't to do that do we).

So until they repeal the laws of economics, look at Britain as a possible preview of things to come.  And given the GDP numbers that have just been released showing a significant reduction in the rate of growth of the economy, the show starts very soon.

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