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.

Michael White Guardian

• Zoe Williams The Guardian, Tuesday 25 May 2010
• Article history

I came full circle about the child trust fund, swinging behind it as I realised its sheer impact, never mind elegance, a fortnight before they canned it. The CTF cost far less than tax breaks on pensions and Isas, and yet its takeup was far higher (40% of people have a pension scheme; 29% have an Isa; 75% of children have a CTF, half of those have people regularly topping it up).

The number of people saving monthly, long-term, for their children, went up threefold, and the amount they were saving went up by 60% since the trust fund’s introduction. It was, said David White, the CEO of the Children’s Mutual, “the most successful savings initiative there has ever been”.

On the level of social justice, its scrappage is dispiriting. Intuitively, I imagined that the people saving into the funds were in the higher income brackets, and the people failing to take up the accounts were poorer. In fact research by the Children’s Mutual shows this not to be the case (40% of those who don’t take up the fund are in affluent categories).

In low-income households there’s been a sea change – one-third of children whose parents have a combined income of £19,000 (this is substantially below the median) are having £19 put away for their futures each month. Children in that band would have no prospect of a lump sum at 18 without this fund. That would probably count them out of university, certainly if fees go up, as they are bound to.

For those who don’t go to university, and 57% of people don’t, a lump sum as modest as two grand could mean driving lessons, and a skill that catapults them into employability.

For middle-income families meanwhile, a well-managed fund, topped up to its limits, could yield £35,000. This is easily the difference between taking a degree and being discouraged by the size of a student loan.

The Child Poverty Action Group (CPAG), along with other similar organisations, wrote to the three main parties before the election, asking if they were prepared to sign up to a fairness impact study. This was to be a rigorously devised document against which new policies could be tested for their impact on inequality – of income, assets or access to services. Clegg said yes, Cameron and Brown gave positive but non-committal responses.

When the coalition was finalised, this request was made again: and while the CPAG waited for the response, this announcement came yesterday. What a disheartening statement of intent. In terms of changing behaviour – encouraging people to engage with financial products, to see themselves as savers, the success of the CTF was peerless.

So much of the conversation since the financial crash has been about the demise of personal saving, the ready acceptance of personal debt, and how important it is for the financial health of the nation that this is redressed. Now the one initiative that made a demonstrable, relatively inexpensive nudge in the right direction is to be axed. It is putatively in the name of responsible stewardship of the national debt. It is so incredibly short-sighted.

Posted at 12:12 pm on 24 May 10 by Adam Lent

Lovely presentations of data on the UK public finances since the war by The Guardian here.  Scroll down to the table near the bottom and you notice something interesting: the period between 1946 and 1979, when the post-war social democratic consensus reined, saw only five years when the public finances were in deficit.  However, since 1979  there have only been seven years when the public finances weren’t in deficit.

Unlike orthodox neo-classical economists, I prefer empirical evidence and history to theoretical models and I think that counts as a pretty strong data set. It suggests two things:

• firstly, the Thatcherite consensus has been far worse than the social democratic consensus at generating a sound fiscal position (pretty poor show given this was the Iron Lady’s big schtick in 1979);
• secondly, that the current European and UK obsession with New Right style austerity cuts will not deliver the long term fiscal stability the politicians claim.

The reason for both is the same – fiscal health is delivered by economic health not vice versa.  The period after the war was characterised by economic stability and growth with only one minor recession. Since Mrs. Thatcher reshaped the UK economy we have suffered three recessions and a series of collapses in the financial sector. There is little chance of sound public finances when they are repeatedly buffeted by the volatility of a free market.  But humanity’s (and economists’) capacity to ignore history is sadly infinite.