So I emailed David Smith to ask. He hasn’t replied yet, but, as I pointed out here, in fact on the point he was disputing with me (why are UK long-term interest rates so low) my views are clearly simply the standard (pre-Keynes) rational model of interest rate determination. Mr Zahawi's statement is in reference to a quote (also cited in my blog here of the same day) from the IMF World Economic Outlook update:
“Among those countries, those with very low interest rates, or other factors that create adequate fiscal space, should reconsider the pace of near term fiscal consolidation.”
"First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both . This form of “crowding out” is just accounting, and doesn't rest on any perceptions or behavioral assumptions."
" These [the wider effects of fiscal consolidation] will tend to boost demand growth, could improve the underlying performance of the economy and could even be sufficiently strong to outweigh the negative effects".
" I am well aware of the fiscal multiplier effect of such strategies, but there is growing evidence that in a debt crisis it is less effective or simply doesn’t work."
"Fiscal consolidation typically lowers growth in the short term. Using a new data set, we find that after two years, a budget deficit cut of 1 percent of GDP tends to lower output by about ½ percent and raise the unemployment rate by ⅓ percentage point."
"[fiscal consoliation] is clearly a drag on demand, it is a drag on growth."
"Growth had been weak throughout the past year, reflecting a fall in real household incomes, persistently tight credit conditions and the effects of the continuing fiscal consolidation. "
"We’ve entered a brave new world in the wake of the crisis; a very different world in terms of policy making and we just have to accept it....Macroeconomic policy [specifically fiscal and monetary policy] has many targets and many instruments."
Want more? Further reading: a more academic, but complementary, analysis from Simon Wren-Lewis.