When the deficit's "under control", will the Conservatives be able to resist deficit-funded tax cuts?

There's no reason why they should even try.

Matt Yglesias asks what could be an existential question for conservatives on both sides of the Atlantic:

This is the question for John Boehner and Paul Ryan whenever they do unveil their balanced-budget plan: Why not make taxes lower instead of balancing the budget? The budget will, presumably, cut spending down to a level that conservatives think is appropriate. Say that sums up to 18 percent of GDP. Well if you're spending 18 percent of GDP and 18 percent of GDP is the right amount to spend, then why is it better to raise 18 percent of GDP in taxes rather than raise 16 percent and borrow the rest?

For the time being, in Britain and America, rhetoric about "getting the deficit under control" and about "shrinking the size of the state" are pointing in the same direction. Both are reasons for the massive spending cuts which the Conservatives and Republicans have attempted to enact.

Most of the attacks on the false connection between those two arguments have been focused on the "shrinking the state" part of the equation. That is, questions like "if we're trying to reduce the deficit, why aren't we raising taxes on the rich/on bankers/on financial transactions" are appropriate for exposing the drive for deficit reduction as a sham, driven largely by ideology.

But what if, instead, we accept — hypothetically — that the size of the state had to be shrunk. Eventually, spending would be "under control", whatever that means for them, and the choice would become whether taxes ought to be at the same level. Why, all things considered, would it be bad if they weren't? Yglesias asks:

Is it because a 2 percent of GDP budget deficit would be inflationary? Is it because an inflation-targeting central bank faced with a 2 percent of GDP budget deficit would be forced to peg short-term interest rates at a high level? What's the problem, exactly, that the budget balancing solves once we've stipulated that spending has been cut to an appropriate level?

Of course, in the political world, we would be unlikely to get such a clear answer to that question. Rhetoric about a "maxed-out credit card", "paying off the country's mortgage" or "unsustainable budget deficits" — where "sustainable" is never defined — dodges the fact that the macroeconomics of small persistent budget deficits in a country which controls its own currency are relatively settled: it's fine. And chances are that if the Conservatives do manage to get the deficit down, and cling on to power through 2015, then they will do the obvious thing, and enact deficit-funded tax cuts.

But getting a straight answer to that question from the economically minded people who call for swingeing spending cuts now would be interesting indeed.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Leader: The unresolved Eurozone crisis

The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving.

The eurozone crisis was never resolved. It was merely conveniently forgotten. The vote for Brexit, the terrible war in Syria and Donald Trump’s election as US president all distracted from the single currency’s woes. Yet its contradictions endure, a permanent threat to continental European stability and the future cohesion of the European Union.

The resignation of the Italian prime minister Matteo Renzi, following defeat in a constitutional referendum on 4 December, was the moment at which some believed that Europe would be overwhelmed. Among the champions of the No campaign were the anti-euro Five Star Movement (which has led in some recent opinion polls) and the separatist Lega Nord. Opponents of the EU, such as Nigel Farage, hailed the result as a rejection of the single currency.

An Italian exit, if not unthinkable, is far from inevitable, however. The No campaign comprised not only Eurosceptics but pro-Europeans such as the former prime minister Mario Monti and members of Mr Renzi’s liberal-centrist Democratic Party. Few voters treated the referendum as a judgement on the monetary union.

To achieve withdrawal from the euro, the populist Five Star Movement would need first to form a government (no easy task under Italy’s complex multiparty system), then amend the constitution to allow a public vote on Italy’s membership of the currency. Opinion polls continue to show a majority opposed to the return of the lira.

But Europe faces far more immediate dangers. Italy’s fragile banking system has been imperilled by the referendum result and the accompanying fall in investor confidence. In the absence of state aid, the Banca Monte dei Paschi di Siena, the world’s oldest bank, could soon face ruin. Italy’s national debt stands at 132 per cent of GDP, severely limiting its firepower, and its financial sector has amassed $360bn of bad loans. The risk is of a new financial crisis that spreads across the eurozone.

EU leaders’ record to date does not encourage optimism. Seven years after the Greek crisis began, the German government is continuing to advocate the failed path of austerity. On 4 December, Germany’s finance minister, Wolfgang Schäuble, declared that Greece must choose between unpopular “structural reforms” (a euphemism for austerity) or withdrawal from the euro. He insisted that debt relief “would not help” the immiserated country.

Yet the argument that austerity is unsustainable is now heard far beyond the Syriza government. The International Monetary Fund is among those that have demanded “unconditional” debt relief. Under the current bailout terms, Greece’s interest payments on its debt (roughly €330bn) will continually rise, consuming 60 per cent of its budget by 2060. The IMF has rightly proposed an extended repayment period and a fixed interest rate of 1.5 per cent. Faced with German intransigence, it is refusing to provide further funding.

Ever since the European Central Bank president, Mario Draghi, declared in 2012 that he was prepared to do “whatever it takes” to preserve the single currency, EU member states have relied on monetary policy to contain the crisis. This complacent approach could unravel. From the euro’s inception, economists have warned of the dangers of a monetary union that is unmatched by fiscal and political union. The UK, partly for these reasons, wisely rejected membership, but other states have been condemned to stagnation. As Felix Martin writes on page 15, “Italy today is worse off than it was not just in 2007, but in 1997. National output per head has stagnated for 20 years – an astonishing . . . statistic.”

Germany’s refusal to support demand (having benefited from a fixed exchange rate) undermined the principles of European solidarity and shared prosperity. German unemployment has fallen to 4.1 per cent, the lowest level since 1981, but joblessness is at 23.4 per cent in Greece, 19 per cent in Spain and 11.6 per cent in Italy. The youngest have suffered most. Youth unemployment is 46.5 per cent in Greece, 42.6 per cent in Spain and 36.4 per cent in Italy. No social model should tolerate such waste.

“If the euro fails, then Europe fails,” the German chancellor, Angela Merkel, has often asserted. Yet it does not follow that Europe will succeed if the euro survives. The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving. In these circumstances, the surprise has been not voters’ intemperance, but their patience.

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump