Today a group of influential Labour MPs call for another £20 billion of government injections into the economy to reduce the impact of the recession. They claim that, if implemented, their package of measures would ensure that 2009 became known as the year the recession bottomed out. The measures include a freeze on stamp duty on house purchases, a tax credit for those buying houses, an increase in the Job Seeker's Allowance and a reduction in capital gains tax on new investments.But what is all this really costing? There are several ways of answering this question. According to the Office for National Satistics ONS), the effect of the bank bailouts has been to add between 70 and 100% of the nation's GDP to national debt. The recession itself has reduced the amount of tax collected from individuals and businesses by around £7 billion. Then there is the cost to the economy of the lost output due to falling demand.
Economists have a simple but useful concept to measure 'cost'. This concept measures not the financial costs but the cost of what is foregone - the opportunity cost. The graphic at the top of this blog shows what the money so far spent on bank bailouts could have bought had it been spent on alternatives. This helps us to make sense of the very big numbers which have appeared of late.
My Year 10 economics and business students will be looking at opportunity cost after they return from half term.
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