Cutting costs is not recessionary

Over at Kiwipolitico Anita states that the government will cut spending on government services by at least the same amount that they are going to increase the size of the fiscal stimulus by spending on infrastructure – and implies that this means that the fiscal stimulus is even smaller

Now, if the government cuts spending but continues to produce the same output this ISN’T akin to “removing stimulus” persee – we instead need to find the appropriate counter-factual.

First say that the government is going to cut the unproductive spending and use it somewhere else – in this case the action would actually increase the immediate income of the economy and help pull us out of the recession.

Say instead that the government held the money – this reduces the amount of debt they are going to take on, which allows the private sector to borrow (lower future tax burden and all that jazz 😉 ). Of course, people are currently more willing to loan money to government instead of firms – so this may not be a wise move on the part of the government in terms of short-term stimulus. However, then the question should be “why don’t you spend this saved money productively” not “why don’t you keep throwing the money at areas that are not producing anything”.

The main counter to this may be that “government cost cutting will lead to a lower level of government outputs”. If this is the case then we have an issue. This brings us to the fundamental question – is the $250m of spending the government is looking to cut currently being put to its best use? If it is then Anita is right – if it isn’t then the government is right.