The government’s austerity plans are the worst fiscal policy mistake in 100 years and will drive the economy into a triple dip that will be worse than the Great Depression, warned David Blanchflower.
The former Bank of England monetary policy committee member, speaking on BBC’s Newsnight yesterday, said: ‘On the fiscal front, the chancellor has committed what I consider to be the most foolish mistake in macro-economic policy in 100 years.
'The economy has not grown at all and shows no likelihood of growing. We actually went into a recession in the first quarter of 2008 and we haven’t restored 50% of the output we lost. This is much worse than the Great Depression, much worse than any other country’s [recession].’
Blanchflower, a renowned dove, strongly defended the BoE’s policy of quantitative easing (QE) and denied the Bank has few further options available.
‘I certainly don’t take the view the Bank of England has run out of options, we are going to see them doing more quantitative easing going forward,’ he said.
‘The economy isn’t growing. Essentially the "plan A" the government has is in fact to do more monetary policy, more monetary easing. That kind of quantitative easing will be to try and help small firms get credit which hasn’t happened, so I don’t believe it has run out of weapons. In fact, I think the counter-factual of what the world would have looked like without quantitative easing is a horrible place - most people take the view that it didn’t work but I take the view, much like [Federal Reserve chairman] Ben Bernanke, that without the QE we have seen unemployment at least double what it is now.’
He went on to say that the government’s major error was to overly dampen down expectations about the economic outlook when it was elected.
‘The biggest mistake the government made is when it came into office and said the economy is bankrupt, the economy is like Greece, that was simply not true and what we have seen is the biggest collapse in business confidence for a very long time,’ Blanchflower said.
‘It was very foolish to not understand what Keynes talked about - Keynes talked about the need to have "animal spirit", so its [now] like a death spiral downwards and you need to break that.
Blanchflower continued: ‘I’ve been talking to business leaders and there is no confidence there...we see no basis on which growth can come, so I certainly think the government has put itself into a hole with its mistaken fiscal strategy and the Bank of England will stimulate more, but unless that happens, we are going to go back into negative output and a triple dip.’
When asked when the Bank’s next round of QE will be, Blanchflower said ‘they are going to do it next month.’
Economists largely believe that the November meeting and decision will have resulted in a far tighter vote than usual.