Now the European Comission has weighed in...

After the 20 and 60 economists, now comes the European Commission: Commenting on when the deficit should be cut.

Recall: The deficit is the shortfall each year in government finances (the difference between government income - from taxes - and government spending).  It's currently at 12.2% of GDP, so over 10% of what the UK earns, in effect.  It's like, if you earn £20000, borrowing over £2000 a year.

Why should it be cut?  It should be cut if the people lending to the government stop believing the government will pay them back.  If this happens, they raise their interest rate.  The rate Greece can currently borrow at is much higher than what the UK can borrow at, for example.

If the rate the UK can borrow at goes up, then the government's spending each year (G) increases, and hence more taxes will be needed to fund it.  This isn't good news.  That's why people argue the deficit needs to be cut very quickly.

On the other hand, we talked yesterday in the lecture about the perils of cutting government spending: It's reducing an injection into the circular flow, and so unless another injection replaces it, then national income must fall.  So it doesn't seem sensible to cut the deficit right away, when the recovery is already fragile, others argue.

As you may be aware, the two major political parties have split on this issue, with the Tories supporting immediate cuts (think 1979/80 from yesterday), and Labour arguing for later cuts once the recovery is under way. 

So today's pitch from the European Commission sees the Tories in a slightly odd position: Agreeing with Europe on something...