So Slasher slashed. He failed to heed the warnings that this was the moment to stimulate growth rather than destroy it, most recently from the president of the United States. In a letter to fellow leaders of the G20 nations, Barack Obama warned that while it was important to put in place credible plans to cut deficits, withdrawing fiscal stimulus so early could endanger the fragile economic recovery. But to no avail. George "Slasher" Osborne was not for turning.
I am now convinced that as a result of this reckless Budget the UK will suffer a double-dip recession or worse, not least because there is no room for interest-rate cuts, although lots of additional quantitative easing (QE) from the Bank of England could soften the blow. As the acting leader of the opposition, Harriet Harman, said in Labour's response: "This Budget isn't driven by economics. It's driven by ideology." It will indeed be bad for jobs, as she rightly argued. Interestingly, Harman pointed out that the area least affected by the so-called austerity measures will be Cheshire, home to the Chancellor's own constituency, Tatton. Politics, like sausage-making, is not pretty.
I believe this Budget will stifle the British recovery in its infancy. Now, to be fair, there are several proposals in it that look like they may well stimulate consumer spending and boost employment. But the fundamental problem is that they are accompanied by measures that will lower aggregate demand and cause hundreds of thousands of job losses.
So let's welcome reductions in corporation tax and small company tax, to get firms investing, and National Insurance cuts for firms outside the south-east, to aid new hiring. But these will be cancelled out by additional public spending cuts of £32bn a year by 2014-2015, plus £8bn in tax increases over and above those to which Labour had already committed itself. This will result in cuts of 25 per cent for every government department bar Health and International Development. The impact on public-sector jobs is likely to be hugely damaging.
A critical problem for the government is that the UK public sector is still highly unionised -- 57 per cent of public-sector workers were members of a trade union in 2008, compared to 15.5 per cent in the private sector. And the public-sector unions are not going to sit idly by and swallow all these unnecessary and destructive job cuts heading their way. Brendan Barber, the TUC general secretary, called the Budget "economically dangerous and socially divisive". Strikes look inevitable.
The biggest issue, however, is what the likely macroeconomic effects of the Budget will be. For political cover, Slasher set up the Office for Budget Responsibility (OBR), which produced its first forecast on 14 June. On the day of the Budget, I took part in a discussion on BBC Radio with the former Tory chancellor Nigel Lawson, who claimed that it had been necessary to create the OBR because the previous government had fiddled the figures. Wrong as ever, Nigel. The OBR had already reported that economic growth was broadly the same as, and the Budget deficit somewhat lower than, Labour had claimed.
Then, on 22 June, Budget Day, the OBR produced a second forecast taking into account the Chancellor's new fiscal measures and showing lower growth in 2010 and 2011 but higher growth after that. The OBR's central projection is that growth will be 1.2 per cent in 2010, 2.3 per cent in 2011 and 2.8 per cent in 2012. That implies quarterly growth rates of 0.6 per cent from the second quarter of 2010. But these forecasts have large margins of error, and indeed in each of these years there is a significant probability in the OBR forecast that growth rates could be zero or lower, before the cuts have even kicked in.
Based on the central projection, the OBR expects unemployment to peak at 8.1 per cent in 2010 before falling slowly to 6.1 per cent by 2014. The table on this page shows where the OBR expects growth to come from. It is predicting that, as public spending falls, private consumption and investment will rise rapidly to replace it; the declining exchange rate will result in net trade also making a major contribution. Investment fell by nearly 20 per cent in 2009, but the OBR expects it to grow by 1.3 per cent in 2010, 8.1 per cent in 2011 and by a wildly unlikely 9.9 per cent on average between 2012 and 2015. It also forecasts that the rebuilding of inventories will make a significant contribution to growth this year.
The OBR made it clear that there are considerable downside risks to its original forecast, but for some reason these warnings were absent in the second forecast, published after the emergency Budget. One such risk related to lending: "A major uncertainty relates to developments in credit and financial markets, in particular whether the banks are able or willing to supply credit in the amount that is normally required in the recovery phase of the economic cycle; and, if not, whether that credit can be obtained elsewhere."
As if on cue, on 18 June the Bank of England reported that the flow of net lending to UK businesses remained negative in April. The major UK lenders reported that demand for credit remained subdued. Total net consumer credit flows also turned slightly negative in April, with the stock of lending little changed from a year earlier. To put it simply, the banks are not lending, just as the OBR feared, which will inevitably constrain growth.
The OBR went on to warn that "another major area of uncertainty is whether, and to what extent, private-sector spending and employment are able to fill the gap that the cuts in public spending in our forecast leave. The prospects for external demand are also uncertain since the outlook for the euro area is particularly opaque at this time."
The euro area appears to be heading back into recession and the austerity measures being introduced in certain eurozone countries, especially those in Germany, will inevitably lower UK growth, too. It is extremely unlikely, therefore, that net trade will leap to our rescue.
So, two big issues arise from the emergency Budget. First, is the private sector going to start hiring and investing again? The tax breaks to businesses will help but this is unlikely to be enough if consumers cut back on spending in the face of fiscal retrenchment and an increased fear of unemployment.
Will the jobs that are to be shed in the public sector be replaced by new jobs in the private sector? Osborne apparently believes that the public sector is "crowding out" private-sector activity. Another of his Tory predecessors, Norman Lamont, made this view clear on 21 June in a newspaper article which claimed that "spending cuts do not destroy resources. They hand the money back to the private sector, where they generate higher returns and wealth-creating jobs." Wrong as ever, Norman. What is much more likely is that the public sector is "crowding in" the private sector and, if so, to cut public spending would be devastating and would likely result in the collapse of the coalition government.
Second, what plans do Osborne and his little Lib Dem helper Danny Alexander, the Chief Secretary to the Treasury (and former head of communications at the Cairngorms National Park), have to reverse course if, as I expect, they plunge the country back into recession? I see no evidence of an escape route or a plan B.
Data, after all, is king -- and so far, there is zero evidence that the private sector is hiring or investing at anything like the required levels to compensate for the implosion threatening to destroy the cuts-hit public sector. And all these harsh measures have been introduced by the coalition because there is supposed to be a crisis in the bond markets, which there isn't; and that the UK is supposedly like Greece, which it is not.
Over the coming months I will be watching the data on investment, consumption, net trade, credit, youth unemployment, output -- and especially private-sector employment -- and will report back on whether Slasher's policies are working or not.
Meanwhile, in the United States, Ben Bernanke, chairman of the Federal Reserve Board and perhaps the pre-eminent living scholar on the Great Depression, issued this stark warning in testimony to the House of Representatives' budget committee on 9 June: "This very moment is not the time to radically reduce our spending or raise our taxes, because the economy is still in a recovery mode and needs that support. Increased taxes, cuts in spending that are too large, would be a negative, would be a drag on recovery." Exactly.
David Blanchflower is Bruce V Rauner Professor of Economics at Dartmouth College, New Hampshire.