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Davis's call for faster cuts is economically reckless

An accelerated cuts programme would prolong the recession.

By George Eaton Published 03 September 2012 16:52

Former Conservative leadership candidate David Davis. Photograph: Getty Images.

The most notable section of David Davis's speech on the economy this afternoon, provocatively entitled "There is an alternative: why the government needs a growth strategy", was that on the spending cuts. Davis's contention is that George Osborne, rather than going "too far, too fast", has cut too slowly. He pointed out that that deficit was £125bn last year and challenged Keynesians to explain why "a fiscal stimulus of this size is not already making our economy grow."

It's an argument that many on the Tory backbenches will sympathise with but it's also hopelessly misconceived. The deficit that Davis highlights is not the result of Osborne borrowing for growth but of a collapse in tax receipts caused by the recession and a higher-than-expected benefits bill (the cost of failure, in other words). And while it's true that the cuts to current spending have been more modest than many claim (current spending is down 2.9% or £11.5bn on 2009-10 levels), the cuts to capital spending, the most valuable spending in growth terms, have been far larger, with investment down 47.9% (£24.4bn) in the last two years.

These cuts go some way to explaining why Britain, with the exception of Italy, is the only G20 country to have suffered a second recession. When consumer spending is depressed and businesses are hoading cash, the government must act as a spender of last resort and stimulate growth through tax cuts and higher spending. If it fails to do so, it crashes the economy, which is exactly what has happened.

Davis also underestimated the damage that faster cuts would have done. An accelerated cuts programme, with even greater job losses (393,000 public sector jobs have been cut so far), would likely have tipped the economy back into recession even earlier.

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Tags: Conservatives David Davis Spending Cuts

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12 comments

Tue, 2012-09-04 21:39 — Indu Pendent

"the government must act as a spender of last resort"

OMG - George you have coined a Labour classic.

Supposing the government borrows and extra £250Bn , the UK fiscal multiplier is 1.6 and marginal import leakage is 50%, please could you tell me in your wisdom what the impact will be on the economy 1) in the 2 years before the next electioned and b) in the period after.

Lets redo the sum. Suppose now the government borrows £600Bn and "invests" it in public services. 1) what would you expect to be the eductional otcome of kids after the spending 2) what would their job propospect be and 3) what growth rate would you expect in UK industry whilst the money was being spent?

Tue, 2012-09-04 12:41 — nourredine

Answer to skylight,
" Holders of our debt will eventually get tired of buying it, causing interest rates on everything from personal loans to home mortgages to increase which will have a dampening effect on our economy. If we don’t have the money, people need to know that we don’t have the money."
To who we ough the money?
These people should know that their investments can go up as much as down.
We cannot repay all of the debts, therefore these rich people need to get real and take it in the chin and move on.
This is what the conservatives are not willing to do yet, but the time will come to do it to save the economy.
Government is garantying the first £85000.00 after that the rich will have to caugh up and it is about time.

Tue, 2012-09-04 02:41 — Posh Tosh (not verified)

He sells Pork in Israel and Saudi Arabia too!

That means his words have no rellevance, as is yesterdays man.

Mon, 2012-09-03 23:23 — Michael Dixon (not verified)

At last an article in the New Statesman that criticises the Conservative right rather than uses it a means of support against the Government.

Davis is a mischievous plotter who lacks judgement and crucially support within the Conservative Party.

Mon, 2012-09-03 20:33 — stevem1940 (not verified)

The debt has been worse in 200 of the last 250 years. In 1945 the country was bankrupt yet the Labour Government created the welfare stste and full employment. Tell us why we can.t go on borrowing?

Tue, 2012-09-04 02:36 — Mike, Dalian (not verified)

Because at some stage, lenders will either require a higher price for the money they lend, or may stop lending altogether when it becomes clear that the UK cannot repay what it has borrowed. Greece has already pointed the way down that road ...

Mon, 2012-09-03 20:33 — stevem1940 (not verified)

The debt has been worse in 200 of the last 250 years. In 1945 the country was bankrupt yet the Labour Government created the welfare stste and full employment. Tell us why we can.t go on borrowing?

Mon, 2012-09-03 19:41 — skylight

This Government is borrowing more each month than we can afford. The last Labour Government borrowed more each month than we could afford. The only reason we are not in a similar situation to Greece is that this Tory led government is commitment to deficit reduction which has allowed the UK to maintain low interest rates and its triple AAA credit rating. Labour will not be electable without a credible economic policy. Borrowing more money simply isn’t a credible economic policy. All governments found it a lot easier to spend during the lean years than to save during the good years. In practice, they didn’t save at all and when trouble came, they had no real resources with which to do any good.

Mon, 2012-09-03 18:50 — matthew fox (not verified)

It looks like Davis is launching another leadership bid.

Mon, 2012-09-03 19:21 — postageincluded

Just the stuff to make Tory backbenchers good and moist.

Mon, 2012-09-03 18:02 — skylight

Our relative prosperity has been largely based on borrowed money, but the situation cannot go on indefinitely we simply can't keep borrowing. Britain needs to get serious about kicking its borrowing habit in reality all we are doing is stealing our children's future prosperity. Holders of our debt will eventually get tired of buying it, causing interest rates on everything from personal loans to home mortgages to increase which will have a dampening effect on our economy. If we don’t have the money, people need to know that we don’t have the money. Why is it that some politicians and commentators when faced with the financial disaster, that is the European economy, put their fingers in their ears and sing la la la. Politicians who should know better, Ed Balls for example and Ed Miliband have thought up a five point plan to rescue the British economy. It involves creating jobs, building houses and cutting taxes all paid for by borrowing even greater amounts of money. It’s as if public sector borrowing is a heroin addiction Labour and the left just cannot kick.

Mon, 2012-09-03 17:16 — Nodbod (not verified)

So despite the widespread agreement from numerous commentators that austerity is not working and we need a programme of growth, this plank gets headlines because not enough Public Sector workers have been put out of work. Words fail me.