The Tory (and Labour) obsession with deficits and cuts
The new Office for Budget Responsibility (OBR) has published its forecast.
The row over cuts, deficits and economic growth continues. From the BBC:
The Office for Budget Responsibility (OBR) predicts the economy will expand 2.6 per cent in 2011, down from the 3 per cent to 3.5 per cent estimate given in Labour's last Budget.
The lower figure will likely increase the impetus of the coalition government to cut public spending, as lower growth means fewer tax revenues.
Yet the OBR also says the deficit and debt will not be as bad as forecast.
It predicts that the UK's public deficit will fall, down to 10.5 per cent of GDP in the 2010-11 financial year, from the 11.1 per cent estimated by Labour.
For overall net government debt -- the sum of all borrowing -- the OBR estimates this will decline to 62.2 per cent of GDP in 2010-11 from the previous estimate of 63.6 per cent.
There is only a 0.3 per cent of GDP difference (maybe 5bn) between Darling's structural deficit forecast and Budd's. This means there is no prima-facie ammo in the Budd Report for a significant tightening in order to eliminate "the bulk of the structural deficit".
Yet the "deficit hysteria" that I highlighted in my NS column this week continues unabated:
We are entering, as promised, the age of austerity. And the nation's finest minds are tormented by deficit hysteria. From the corridors of Whitehall to the studios of the BBC, the debt delusion -- that Britain is bust, bankrupt, broke -- reigns supreme.
Across the spectrum, from right to left to wherever the Liberal Democrats might be these days, politicians and policymakers mouth the mantra of "Cuts, cuts, cuts". "Swingeing", one of the oddest words in the English language, seems to have become a permanent addition to the political and media lexicon.
Larry Elliott has a brilliant but depressing piece in the Guardian today ("The lunatics are back in charge of the economy and they want cuts, cuts, cuts"), in which he reminds us of how FDR made the mistake of heeding the advice of the "sound money" economists in his administration and cut spending in 1937, thereby tipping the fragile US economy back into recession.
He also refers the reader to a new study by the economist Charles Dumas, of Lombard Street Research:
Dumas notes: "If some countries deflate their economies in an attempt to cut their government deficits, other countries will have a larger deficit -- and even the deflating countries will be partially frustrated in their endeavours. Why? Because they will induce a renewed recession that will hammer tax revenue and enforce greater relief spending." The result, he warns, "will almost certainly be renewed European recession, quite possibly a prolonged depression".
Meanwhile, Ed Balls and Alastair Darling are locked in a public spat over Labour's fiscal record in office and the latter's refusal to rule out a rise in VAT in the run-up to the election. I'm with Balls on this one. And, in my humble view, the former chancellor of the Exchequer too easily accepted the narrow, debt-obsessed parameters of the deficit hawks inside the Treasury, and in the commentariat and the financial markets. Labour's pledge to halve the deficit in four years was unnecessary and arbitary (why not three? or five?), and meant that the party was -- still is -- unable to make a credible or coherent case for Keynesian counter-cyclical spending.
Then there are those New Labour figure who seem to fetishise deficit reduction, cuts and balanced budgets. Andrew Adonis, the former transport secretary and one of the cleverest ministers to serve under Tony Blair and Gordon Brown, wrote in yesterday's Sunday Times:
Credibility on deficit reduction after 2011 will be vital for Labour's new leader if he (or she) seriously aspires to become prime minister.
And John Rentoul, the Independent on Sunday's chief political commentator and self-confessed "ultra-Blairite", wrote in his paper yesterday:
The long campaign, with the winner to be announced at the start of the Labour conference in September, is good for the party. By the end of the process the candidates might have got down to the real issue, which is what Labour can say about the vast fiscal deficit with which it saddled the country.
The last bit of that last sentence reads almost as if Rentoul had lifted it wholesale from a Tory press release. It is nonsense, of course -- the bankers, not the Brown government, "saddled" the country with a "vast fiscal deficit".
Thankfully, the preferred Labour leadership candidate of both Adonis and Rentoul, the former foreign secretary David Miliband, is taking a more social-democratic approach, arguing at a packed Compass conference on Saturday that Labour has to make the case that "deficits are not immoral". The elder Miliband also hailed the columns -- in this magazine! -- of Professor David "Danny" Blanchflower, who has consistently and cogently argued against premature and dangerous cuts in public spending since he joined the New Statesman in September 2009.
In fact, here's Danny, writing in the Sunday Mirror yesterday, specifically on the subject of George "Slasher" Osborne's forthcoming emergency Budget and the associated "cuts":
"It will do terrible and probably irreversible damage to the British economy. I am now 100 per cent certain these actions will push us into double-dip recession."
I do hope Danny, Larry and I are wrong and, for the sake of this country, that the Osbornes and Rentouls are right. But the lessons of history, as Larry Elliott points out, don't bode well for the UK economy.