Magazine article Public Finance

Cuts Put Recovery at Risk, Warns Koo

Magazine article Public Finance

Cuts Put Recovery at Risk, Warns Koo

Article excerpt

The government deficit cuts risk stalling economic growth, leading economist Richard Koo told the conference.

Koo, chief economist of the Nomura Research Institute, said Britain, Europe aitd the US faced a 'balance sheet recession' - where individuals and companies focus on paying down debt rather than borrowing. The UK was 'at the entry point' of this situation, even with interest rates close to zero.

He said these problems echoed what happened in Japan in the 1990s. The lack of demand in the private sector meant the government needed to keep spending to maintain economic growth until the private sector was ready to borrow again.

Koo told the conference that at 7.3% of gross domestic product, the UK government's economic stimulus was not enough to cover for the savings of 8.7% of GDP that the private sector had made.

The Japanese experience had twice shown that if public spending cuts happen before the private sector is willing to borrow again, the 'whole thing will come crashing down', he said. …

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