Why the deficit hawks are wrong

The government is using the example of Canada in the 1990s to promote its proposed sweeping spending

"Dear Mehdi," began the email from the Prime Minister that landed in my inbox on 7 June. “It's been a busy few weeks, so sorry I haven't emailed for a while." Busy indeed. But apology accepted. Ensconced inside his new home in Downing Street and with his wife, Samantha, busy redecorating the No 10 kitchen, "Dave" Cameron has lost none of his personal charm or popular touch.

This week, the former head of communications for Carlton TV, joined by his Chancellor, George Osborne, and his Lib Dem Deputy, Nick Clegg, launched a PR offensive - on-air and online, in parliament and in the press - to clear the ground for the biggest round of cuts in public spending since the Great Depression.

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.

Deficit disorder

But why? None of this frenzied obsession with budget deficits, or fear-mongering about credit ratings, is new or original. "At every stage in the growth of that [national] debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt kept on growing; and still bankruptcy and ruin were as remote as ever."

Those were the wise words of the 19th-century historian Thomas Macaulay, in his landmark History of England. They remain relevant today. Our national debt as a proportion of GDP is below that of France, Germany, Italy, Japan and the US. Britain is not Greece, which is still in recession, locked into the euro and has a much higher level of debt. Therefore, cutting the deficit should be, in the words of the US treasury secretary, Timothy Geithner, a "medium-term" issue.

But the Tories disagree with the Obama administration. "The most urgent issue facing Britain today," Cameron said in a speech on the same day he sent out his apologetic generic email, is "our massive deficit and growing debt". Cutting that debt, he warned, would “affect our economy, our society - indeed our whole way of life".

The day before, in a newspaper interview, Clegg - playing good cop to Cameron's bad - promised "progressive" cuts to spending that would avoid "the harshness of the 1980s . . . We're not going to do it the way we did in the 1980s." (Note to the Deputy Prime Minister: contrary to left-liberal mythology, current public spending under Margaret Thatcher increased by 1.7 per cent a year, between 1979 and 1990. The "Iron Lady" cut overall spending in only one year - 1988-89.)

But Clegg, echoing rhetoric deployed by Cameron and Osborne a year ago, chose to draw our attention to the example of Canada, where he said a "progressive" government had made "really painful decisions" on deficit reduction in the 1990s. The fiscal equivalent of a new and little-known holiday destination, Canada has lately become the talk of the Westminster village, with the government's professed plans for "Canadian-style" spending cuts splashed across the front pages of the right-wing press.

The Canadians did manage to eliminate their $42bn deficit in a mere three years, with central government spending cut by around 20 per cent in just four. Cameron and Clegg, however, might want to think again before heading down the Canadian road.

For a start, the Canadian cuts were executed in an era of global growth and prosperity. As Jocelyne Bourgon, formerly Canada's senior civil servant in government and architect of the country's cost-cutting strategy, confessed: "We had a bit of luck in that during the three years of the programme, there was not a global recession. That makes a difference, for sure."

There is, besides, the extent of the Canadian cuts - according to the Institute of Economic Affairs, following the 1990s Canadian example and implementing spending cuts of 20 per cent today would be the equivalent of £140bn of British cuts. That way, riots beckon.

In fact, nearly a quarter of all Canadian public-sector employees - as many as 55,000 people - lost their jobs. Can TweedleCam and TweedleClegg afford to make a quarter of British public-sector employees - or 1.5 million people - redundant? If so, my colleague David Blanchflower's prediction in September last year of five million or more unemployed might prove to have been prophetic.

Big gamble

Yes, the Tories and their deficit-hawk supporters are right to point out that the Canadian economy grew at just under 4 per cent a year between 1995 and 2000. But what these "progressives" on the neoliberal right ignore is the rapid rise in poverty and inequality in Canada in the wake of the cuts. "After 20 years of continuous decline, both inequality and poverty rates have increased rapidly in the past ten years," noted the OECD in 2008, "now reaching levels above the OECD average."

But Cameron is adamant. "Britain will emerge from this country [sic] stronger, better and richer," he concluded in his email. I hope he is right and I am wrong. The ideological small-state Conservatives and the Orange Book Lib Dems - who ditched their own manifesto commitment to a delay in cuts with an unseemly haste - must know that they are gambling everything on, to borrow a phrase from the recently departed David Laws,"progressive austerity".

It worked in Canada, where the Liberal government was re-elected in 1997; it might not work in the UK come 2015. The slogan "Yes it hurt. Yes it worked" didn't save John Major's Conservatives in 1997. And this time round, few of us have yet to comprehend fully the extent of the economic pain that is heading our way.

The Bank of England governor Mervyn King's pre-election warning that the winner of the 2010 election would be forced into austerity measures so severe and unpopular in government that his party would be kept out of power for a generation could turn out to be prescient.