Why stimulus will not work

I watched the Sunday Politics today, and the head to head between the ideas of stimulus versus austerity. Stimulus will nearly always enable more economic growth, after all how could the pumping of money by the Government into the economy not feed into higher GDP figures.

The point was made that by putting money into projects to enable employment will give greater tax revenue. True, but at what cost? If you think about the money going into projects some will be spent on supplier companies, materials, and financing jobs which means that people have money to spend in the wider economy and then can pay tax back to the Government. It sounds great, but consider that some of the money will be lost in bureaucracy, some will be sent to foreign companies, some will be put into bank accounts by thrifty employees in difficult times. So not all the money spent can be recovered. It will only be recovered if it spurs confidence in the economy, so that private companies invest - only then can it be truly successful.

The last Labour Government did provide a stimulus, which created a burst of 2% growth, but when the stimulus was removed the growth disappeared. The key factor was that the Eurozone crisis occurred, and business confidence had vanished. The stimulus effect had been wiped out. That's the reason why spending more now will not help, the Eurozone crisis is still with us with a fresh bout of instability. Spending merely adds to the debt burden.

We have to stick to a programme of reducing the deficit. If the Eurozone problems are resolved, maybe a stimulus will be able to work within a framework of increasing business confidence. Until then, stimulus will only provide the mirage of growth and is really throwing good money after bad.

Squiffy.