Do we need more government help?

Fans of quantitative easing would argue that it helped the UK exit the recent recession but critics describe its impact as limited at best.

With a fresh round of spending cuts in the offing, Stuart Thomson from Ignis Asset Management believes another dose of quantitative easing is needed, while Dr Stephen Barber from Selftrade argues that the new spending cuts won't have as big an effect as perceived, rendering further easing unnecessary.

YES: says Stuart Thomson, chief economist at Ignis Asset Management

Economics is simple: if you throw enough money at an economy, it will grow, but if you withdraw this stimulus while the financial sector is still de-leveraging, then it will slow. The preliminary second quarter GDP data provides a perfect example of this process.

The economy grew by 1.1% in real terms. Unfortunately, this is as good as it gets for the fledgling recovery. This performance was driven by extraordinarily loose monetary and fiscal policy.

Fiscal expenditure will move from feast to famine in the second half of the year, with the new coalition government accelerating spending cuts and tax hikes, adding a cumulative £40 billion of tightening over the next four years to the £73 billion authorised by the previous Labour government.

The experience of economies recovering from deep financial sector-led recessions is well documented and suggests that economic activity remains subdued and vulnerable for up to five years after the recession ends, while inflation continues to slow for three years. The case for more quantitative easing rests with the national balance sheet.

Fiscal austerity represents increased government savings, which over time should be balanced by increased spending by consumers and companies that have built up savings during the recession.

However, timing mismatches driven by companies' efforts to pay off debt, can lead to planned savings exceeding planned investment, resulting in insufficient overall demand and ultimately recession.

In this environment, the monetary transmission mechanism is impaired, and near-zero base rates are unable to stimulate a self-sustaining recovery.

The solution is for the central bank to purchase government bonds to lower the term structure of interest rates and encourage consumers' and corporates' animal spirits.

NO: says Dr Stephen Barber, an academic adviser on economics and markets for Selftrade

Although quantitative easing was useful when employed in the aftermath of the credit crunch, the current public spending cuts are unlikely to affect overall demand in the economy quite as much as is popularly suggested.

While important for a time, over the cycle, loosened monetary policy and its corresponding devaluation of sterling have been far more important than stimulus-spending in sustaining recovery.

At its July meeting, the Bank's Monetary Policy Committee voted to continue with quantitative easing asset purchases to the tune of £200 billion.

My judgment is that should more quantitative easing be required in the immediate future, it will be aimed at out of target prices rather than as a substitute growth stimulus.

The chancellor's plan to balance the budget over the course of five years is both ambitious and fraught with risks – both to his own reputation and to the health of our economy. Spending cuts are going to be painful and will have a detrimental effect on consumer confidence.

Nevertheless, we seem to have developed a flawed mentality that considers 'public spending' and 'fiscal stimulus' to be interchangeable terms. But not all spending is stimulus, and while all will have some beneficial effect on domestic demand, a lot of it is inefficiently targeted. 

Meanwhile, June's Emergency Budget maintained important capital spending, which is likely to be a significant contributor to economic growth in the coming years. 

Given the eurozone woes, the alternative scenario of not tackling the structural deficit has implications for the ability of policymakers to manage monetary conditions.

Furthermore, as US Federal Reserve chairman Ben Bernanke's recent comments attest, quantitative easing could be employed were deflationary pressures to re-emerge.

At the moment, such pressures seem evenly balanced, so quantitative easing is not necessary.