The government’s proposed cure for the ailing British economy could be a bit like applying leeches to 18th century patients: worse than the disease
Like all sensible people, I hope that David Cameron and George Osborne know what they are doing when they set out to chill our collective spine as they do in all the newspapers this morning about the scale of the coming cuts to public expenditure.
It was a warm-up for the PM’s big “everyone’s life is going to change” speech today.
But like many sensible people I have my doubts about the wisdom of this carefully choreographed exercise ahead of the chancellor’s 22 June budget. If they do what they say – I am still hoping that they don’t meant it – the cure could be a bit like applying leeches to 18th century patients: worse than the disease.
It was wholly predictable that when they came to power they would open the Treasury books and declare it all to be much worse than they feared. All new governments say that. So it doubtless is in some respects.
But in those respects that matter most it’s not, it’s better, not least when compared by some airheads with the plight of Greece. Even that £156bn deficit they keep talking about is £20bn less than it was predicted to be not so long ago. That is not an insignificant sum.
The urgent case for cuts is that a combination of Gordon Brown’s structural budget deficit – 4%? 6%? – and the cost of rescuing the banking system is unsustainable and must be rectified as soon as possible.
The fear is that without a clear plan for deficit reduction the belatedly panicky credit rating agencies – the people who failed to spot the emerging banking crisis – will mark down Britain’s triple-A credit rating, as they recently did Greece and Spain: the sovereign debt crisis that has engulfed the eurozone.
If that happens lenders will require higher interest payments in return for funding our debts and more cuts will be required to keep up the payments: the kind of downward spiral that so hurt public spending in the Thatcher-Major years.
All true enough, but the key word is “plan”. We need ministers to sound as if they mean it, as Alistair Darling was starting to do with his deficit reduction plan after facing down Brother Brown.
The papers today are full of talk of the Lib-Con coalition’s “Geddes Axe” in the 1920s and – more recently the federal Canadian government’s 20% cuts in the 1990s, as here in the Daily Telegraph. When I wrote about it last year – it was promoted by the new Institute for Government – I made a serious error. I forgot that the Canadian provinces do most of the spending, so the parallel is inappropriate.
But that’s a detail. The real threat lies in all states that have overdone it – the US is the prime example – dashing to rebalance their economy, public and private sectors, as advised by the hairshirted states – Germany is the prime example.
The result: hopes of renewed growth collapse and the world falls back into beggar-my-neighbour recession. It’s growth that will float the debt away most effectively. Remember, Margaret Thatcher’s savage cuts in the early 80s worked in market terms but did unnecessary damage to UK industry in the process.
In the IMF crisis of the 70s Denis Healey – a man of great self-confidence – had to fight gloomy Treasury predictions that with hindsight turned out to be excessive. The Treasury will be keen to take advantage of the new team’s youth and inexperience to reverse both Labour mistakes and Labour’s values. None of them resigned in protest, I note in passing.
Bear in mind the following facts as you soak up the masochism. The UK economy is currently operating at 10% below its pre-crisis trend. The British government can borrow at real interest rates below 1%. The ratio of debt to GDP was 68% by the end of 2009-10 against 73% in Germany, 77% in France and an average of 87% over the last century or so.
Cheer up. British debt, mostly funded by British lenders who are saving madly – as in so much, unlike Greece – also has a much longer maturity, 13 years on average: no panic. British savers can finance British borrowing, and until the private sector recovers the state sector had better keep on spending if we are to avoid renewed recession.
If the new government raises taxes, cuts spending and – just for luck – tightens monetary policy too via higher interest rates and does so too quickly, we are all going to feel the pain all right. And soothing words from Nick Clegg in yesterday’s Observer – soft cop to Dave’s tough cop – will not save us.