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.

As the BBC's Paul Mason notes on his blog (hat-tip: Left Foot Forward):

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.

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

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Why relations between Theresa May and Philip Hammond became tense so quickly

The political imperative of controlling immigration is clashing with the economic imperative of maintaining growth. 

There is no relationship in government more important than that between the prime minister and the chancellor. When Theresa May entered No.10, she chose Philip Hammond, a dependable technocrat and long-standing ally who she had known since Oxford University. 

But relations between the pair have proved far tenser than anticipated. On Wednesday, Hammond suggested that students could be excluded from the net migration target. "We are having conversations within government about the most appropriate way to record and address net migration," he told the Treasury select committee. The Chancellor, in common with many others, has long regarded the inclusion of students as an obstacle to growth. 

The following day Hammond was publicly rebuked by No.10. "Our position on who is included in the figures has not changed, and we are categorically not reviewing whether or not students are included," a spokesman said (as I reported in advance, May believes that the public would see this move as "a fix"). 

This is not the only clash in May's first 100 days. Hammond was aggrieved by the Prime Minister's criticisms of loose monetary policy (which forced No.10 to state that it "respects the independence of the Bank of England") and is resisting tougher controls on foreign takeovers. The Chancellor has also struck a more sceptical tone on the UK's economic prospects. "It is clear to me that the British people did not vote on June 23 to become poorer," he declared in his conference speech, a signal that national prosperity must come before control of immigration. 

May and Hammond's relationship was never going to match the remarkable bond between David Cameron and George Osborne. But should relations worsen it risks becoming closer to that beween Gordon Brown and Alistair Darling. Like Hammond, Darling entered the Treasury as a calm technocrat and an ally of the PM. But the extraordinary circumstances of the financial crisis transformed him into a far more assertive figure.

In times of turmoil, there is an inevitable clash between political and economic priorities. As prime minister, Brown resisted talk of cuts for fear of the electoral consequences. But as chancellor, Darling was more concerned with the bottom line (backing a rise in VAT). By analogy, May is focused on the political imperative of controlling immigration, while Hammond is focused on the economic imperative of maintaining growth. If their relationship is to endure far tougher times they will soon need to find a middle way. 

George Eaton is political editor of the New Statesman.