When rebalancing goes bad: Why the chancellor's deficit reduction plan threatens the economic recovery

Published Wed 10 Dec 2014
This short briefing explains the four economic sectors that make up the UK's fiscal balance sheet, and identifies some dangerous assumptions lurking in the chancellor's plans for deficit reduction in the next five years.

'If the next government tries to follow the chancellor's stated deficit reduction path, one of two outcomes is likely. Either it will succeed in the short term only because the household sector takes on debt at a faster pace than it did before the financial crisis – with the associated risk of a house-price bubble and burst, followed by a recession and ultimately a new blow-out in the government deficit. Or it will fail even in the short term because the necessary adjustment in other sectors occurs only through weaker growth. Neither of these appears to be a sustainable basis for economic recovery.'

Tony Dolphin

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