Is the UK government spending its way out of recession, the correct move!

Is the UK government spending its way out of recession, the correct move!

FT(http://www.ft.com/cms/s/0/bbb07600-b681-11de-8a28-00144feab49a.html):
In recent months, a number of key economists have produced contradicting argument about t he appropriateness of government spending to prevent the UK economy from falling into the brinks of an economic “slump”. An invective exchange between Paul Krugman (officially known as “the Nobel prize-winning Paul Krugman”) of Princeton and the New York Times, and John Cochrane of the University of Chicago have developed into two schools of toughts. The first, a pro Keynesian approach, overarching macroeconomic analysis, questioning markets efficiency and supports government intervention to help pull the world out of recession. The second, whose macroeconomic conclusions are closely rooted in microeconomics, emphasised on greater trust on the markets to correct itself.

The Guardian : http://www.guardian.co.uk/business/2009/oct/11/budget-deficit-reduce-osborne-darling-conference
Reviewing some of the politics that took place last week we see a similar debate between the Conservatives who appear to be pro-market efficiency by promoting spending cuts. George Osborne, as shadow counsellor unveiled measures claimed to save £7 billion a year by freezing the pay of five million public sector workers in 2011, while the bulk of the rest would come from that old chestnut beloved of politicians – efficiency savings in Whitehall. He further noted that the rich have to share the burden of the spending cuts and tax rises that are needed to bring the public finances – the fastest-deteriorating of any major economy – back into line such as through the 50% new tax rates planned. While these initiatives are intended to put national debt back to normal levels, the Institute for Fiscal Studies sees the national debt peaking at close to 80% of GDP by 2015 – up from 40% last year and 30% in 2000 – and not returning to 40% until 2030.

The Telegraph http://www.telegraph.co.uk/news/newstopics/politics/gordon-brown/6284662/Gordon-Brown-warns-against-new-age-of-austerity.html
The Telegraph noted an interview by Mr Brown dismissing David Cameron’s Tories as “pessimists” whose plans for the biggest cuts in public spending for 30 years are a “recipe for high unemployment”. He notes that “If you have a growth policy for Britain, get unemployment down, get the economy moving forward, then Britain can have up-growth”. Gordon further noted that the Tories’ plans for public sector cuts would prolong the recession, he says, with tens of thousands of young people unable to find work.
Cutting out the politics from the debate, it would seem that both the Labour and Tories make their case consistent with the pro Keynesian and market efficiency principles as noted above.
Telegraph : http://www.telegraph.co.uk/news/newstopics/politics/conservative/georgeosborne/6224723/Tory-public-spending-cuts-could-push-unemployment-to-5-million.html
In a recent writing reported by the Telegraph, Professor David Blanchflower, a labour market expert, who is professor of economics at Dartmouth College in the USA and served on the MPC until June this year, told the New Statesman: "Unemployment is going to continue to rise this year and may keep on rising. He attacked the economic plans of George Osborne, the shadow chancellor, claiming they would create a "lost generation" of workers. He said that any cuts in public spending could force unemployment up from its current 2.5 million to four million over the coming years. But in a message aimed directly at Mr Osborne, he warned that his plan for accelerated action to bring down the £175 billion state deficit would force joblessness up further. He also disagreed with Gordon Brown recent announcement that some cuts are inevitable once recovery is in place, by arguing that any such actions should be deferred until at least 2012. Professor Blanchflower warned that "If spending cuts are made too early and the monetary and fiscal stimuli are withdrawn, unemployment could easily reach four million. "If large numbers of public sector workers, perhaps as many as a million, are made redundant and there are substantial cuts in public spending in 2010, as proposed by some in the Conservative Party, five million unemployed or more is not inconceivable. Professor Blanchflower referred to the mistakes of the 1930s, by assuming a recovery is taking place and then cutting spending and raising interest rates too early. This gave rise to a decade-long depression.
Thus, the debate on the appropriateness of extending and maintaining government spending appear to be clouded by political agendas of the respective parties, whether it is the Labour or Conservative.
However, there has been some level of support to the government Keynesian approach as increased spending should lead to improved consumption, increased money supply and in turn, naturally result in increased consumption. It is this consumption which is hoped to be the key driver and “multiplier” for economic growth (http://www.econ.washington.edu/user/cnelson/Chap11.pdf).