UK economic policy illogical, says Larry Summers

Austerity in the UK has cut demand and output more than even pessimists predicted, former US Treasury Secretary Larry Summers has told the BBC.

In an interview with Newsnight, Prof Summers also criticised the government's plan to guarantee some mortgage lending to boost the economy.

He told the programme he had some difficulty following the logic of UK fiscal policy.

The former World Bank chief economist has advised three US presidents.

Referring to last weeks Budget measure to help would-be home buyers by guaranteeing some mortgage borrowing, Prof Summers said a loan guarantee was more or less the same thing as a loan, and that taxpayers could be exposed to potential losses.

"I must say as an outside observer I have had some difficulty following the logic of British policy, I would have supposed - and it's something that's taught in basic finance text books - I would have thought a loan guarantee is more or less the same thing as a loan.

"Both expose tax payers to risk of loss."

Cuts

Last week's Budget also saw predictions for UK growth halved.

He said that Britain was undertaking a powerful test as to whether austerity could create growth and that the results so far have not been encouraging.

"Britain has been a powerful and empirical test of the efficacy of determined, resolute austerity.

"The results so far have not been encouraging to advocates of that strategy.

"The results so far have suggested that in line with predictions that austerity has led to reductions in demand which has led to reductions in output, to an even greater extent than pessimists predicted."

Prof Summers said that reductions in output have led to downward revisions not just in current output but in projections as to the economy's future.

Prof Summers was a staunch advocate of bank deregulation in the late 1990s which some say played a key role in the recent financial crisis

He was critical of the way European leaders had managed the eurozone crisis, saying they had created uncertainty in people's minds, particularly over Cyprus.

Referring to the plan to tax all bank deposits, subsequently abandoned, he said: "A question has been lodged about what has previously been seen as absolute, the willingness to stand behind assured bank deposits."

He added though that he expects a way will be found for the eurozone to survive, as the consequences of it failing to survive would be "catastrophic".