"If you have a household that can't pay its debts, you tell it to cut back on spending to free up the cash to pay the debts. But in a national economy, if you cut back on your spending, then economic activity goes down, nobody invests, the amount of tax you take goes down, the amount you pay out in unemployment benefits goes up - and you don't have enough money to pay your debts.I like this: "There's absolutely no reason why you couldn't tax speculative gains [from rising house or land prices] by 40 per cent. There's no social return on it and land is going to be there whether people have speculated or not. But you lower the tax on investment in things like R&D."
"The old story is still true: you cut expenditures and the economy goes down. We have lots of experiments which show this, thanks to Herbert Hoover and the IMF," he adds. The IMF imposed that mistaken policy in Korea, Thailand, Indonesia, Argentina and hosts of other developing countries in the 1980s and 1990s. "So we know what will happen: economies will get weaker, investment will get stymied and it's a downward vicious spiral. How far down we don't know - it could be a Japanese malaise. Japan did an experiment just like this in 1997; just as it was recovering, it raised VAT and went into another recession."
Then why have we not learned from all that? Because politicians like George Osborne are driven by ideology; the national deficit is an excuse to shrink the state because that is what he wanted anyway. Because the financial market only cares about one thing - getting repaid. And because other European governments are panicking because of the market's wild attack on Greece and Spain, and they don't want to be next.