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3 September 2012

Davis’s call for faster cuts is economically reckless

An accelerated cuts programme would prolong the recession.

By George Eaton

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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