In February 2010, George Osborne hailed a “really significant moment in the economic debate” after 20 prominent economists signed a letter to the Sunday Times endorsing his deficit reduction strategy. They stated: “In order to be credible, the government’s goal should be to eliminate the structural current Budget deficit over the course of a parliament and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-2011 fiscal year.” Two and a half years later, the UK is mired in a double-dip recession and, owing to the absence of growth, Mr Osborne is on course to borrow £11.8bn more than his predecessor, Alistair Darling, planned. Rather than increasing confidence, the government’s austerity programme has destroyed it.
The New Statesman asked the 20 economists who signed the letter whether they now regretted doing so and what they would do to stimulate growth. Of those who replied, only one was willing to repeat his endorsement of Mr Osborne. Nine urged the Chancellor to abandon his opposition to fiscal stimulus and to promote growth through tax cuts and higher infrastructure spending; others merely said “no comment” or were “on holiday”.
Roger Bootle, the managing director of Capital Economics, said: “If I were Chancellor at this point, I would alter the plan, I would stop the cuts to public investment and I might even seek to increase it.” Hashem Pesaran of Cambridge University declared that the government’s policies “have not followed the balance I had in mind when I signed the letter”. Osborne, he said, had pursued “fiscal reductions at the expense of growth-inducing policies”. Danny Quah of the London School of Economics wrote: “Have I changed my mind since signing the letter? Yes. Because circumstances have changed . . . The fear that UK borrowing would become overly costly has become much less relevant.” Another economist who signed the letter, the Nobel laureate Christopher Pissarides, had already changed his position on deficit reduction, urging the government in an NS article in October last year to stimulate demand through tax cuts.
The Chancellor has consistently sought to portray his critics as mavericks, as “deficit deniers”. He can no longer do so. In his refusal to borrow for investment, despite the UK enjoying its lowest market interest rates in 300 years, it is now Mr Osborne, not his opponents, who stands outside the mainstream consensus. As the International Monetary Fund has stated, there is no evidence that a reduced pace of deficit reduction would trigger a rise in British bond yields. With investors increasingly reluctant to lend to eurozone countries, the UK is, as Mr Osborne has tautologously observed, a “safe haven”. (Aren’t all havens safe by definition?) Yet, for no reason other than political pride, the Chancellor has tied his hands by spinning the line that even a small stimulus would “bankrupt” Britain.
Over in the United States, the Wisconsin congressman Paul Ryan, anointed as the Republican presidential candidate Mitt Romney’s vice-presidential nominee, is enjoying many of the plaudits that Mr Osborne once attracted. Even liberal commentators feel obliged to preface any criticism of him with praise for his “braveness” and “seriousness” in his desire to reduce the US’s $15.9trn national debt.
Mr Ryan’s reputation as a fiscal hawk, based on his 2012 budget proposal, The Path to Prosperity, is undeserved. His debt projections rest on the assumption that government spending, excluding Medicare, Medicaid and social security, can be reduced by 70 per cent to 3.75 per cent of GDP in 2050. It cannot. The US has never spent less than 3 per cent of GDP on defence – one reason why Mr Romney has pledged to keep defence spending above 4 per cent – and the extreme spending cuts required are politically unfeasible.
Worse, the tax cuts proposed by Mr Ryan, including a 10 per cent reduction in the top rate of tax and the abolition of taxes on capital gains and inheritance, would make US debt more likely to rise, not fall. These fiscal objections aside, his plan would also entail a transfer of wealth from the poorest to the richest. While those earning $1m or more a year would receive an average tax cut of $265,000, those with incomes between $10,000 and $30,000 would suffer tax rises. As the late Gore Vidal remarked of the theories of Ayn Rand, Mr Ryan’s hero, the plan is “nearly perfect in its immorality”.
For the sake of America’s poor and the country’s fragile economic recovery, it is essential that Mr Ryan, unlike Mr Osborne, is not presented with a laboratory for his ideological experiments.