Growth, not “painful” cuts, will lead to deficit reduction

Green Politics

The Coalition should not kid itself that making Britons swallow painful medicine will ward off the financial markets - austerity measures do not inevitably lead to deficit reduction.

The Coalition Government’s emergency budget takes place in two weeks’ time, on June 22; what we will probably get will be a combination of tax rises – some like the increase in capital gains tax should be supported unless there are too many exemptions, alongside others like increasing VAT to 20 per cent which will hit the poorest and should be opposed – and large public spending cuts that will inevitably hit the poorest and most vulnerable.

Labour must continue to oppose drastic public spending cuts. There are several reasons for this. Firstly, our economic recovery remains weak; indeed, even the British Chamber of Commerce (BCC) has revised its growth forecast for 2010 up to 1.3 per cent, but revised its growth expectations for 2011 down to 2 per cent.

The BCC has made these calculations on the basis of a VAT rise, and other tax rises, and predicts a reduction in public sector net borrowing from £156 billion in 2009 to £147bn in 2010/11 and £116bn in 2011/12. The BCC has also warned against significant cuts beyond the £6bn of efficiency savings already announced.

The emphasis of the Government should not be on cuts but growth. After all, it is growth, not cuts, that will pay down our deficit. The Brown Government re-embraced Keynesian stimulus measures when the crisis hit, and the fact is that, without these measures, unemployment would be 500,000 more than it currently stands.

The BCC is also right that the Bank of England should keep interest rates low for the foreseeable future, to allow firms to invest, in direct contrast to the Coalition’s economic mantra. The Organisation for Economic Co-operation and Development may warn that low interest rates could lead to rising inflation, but with inflation at a manageable 3.7 per cent investment and job creation should take priority.

Another factor has also entered the equation: the crisis facing the eurozone. Rioting against austerity measures in Greece continues unabated, while Spain and Portugal have also had their credit ratings downgraded, even on the back of painful austerity budgets. Now there is a rush across many EU countries (even France) to introduce austerity budgets, because they, too, are terrified of having their credit ratings downgraded. This contagion could spread to Britain – with dangerous consequences, particularly for unemployment.

Above all, the Coalition should not kid itself that making Britons swallow painful medicine will ward off the financial markets. Austerity measures do not inevitably lead to deficit reduction; economic growth, however, does. This means investment should be maintained until we can see steady growth.

Update 12:30

For once the Guardian and Telegraph are united. Ed Conway writes:

Yes the Budget deficit is dire, but the Prime Minister is being disingenuous at best in claiming that it is “worse than we thought”, as he has done in Milton Keynes today. If anything, it is actually a bit better than previously thought.

While Michael White at the Guardian says:

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.

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36 Responses to “Growth, not “painful” cuts, will lead to deficit reduction”

  1. John Lees

    Yes I agree the solution to our problems is to borrow borrow borrow / spend spend spend – they won’t dare to ask for it back or charge interest and if they do we can simply print more and more money (quantative easing) – inflation is for wimps. Anyone stupid enough to suggest that we should try to balance the books is a racist reactionary tory. Follow Comrade Mugabe into the sunlit uplands of socialist dreams.

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  3. Billy Blofeld

    Benjamin,

    I’m with Anon E Mouse – cuts and growth, cuts and growth………

    There is no need to be such a “scaredy pants” about cuts – see this from the world of horticulture:

    “A correct pruning cut will allow for quick healing and promote vigorous growth from the closest bud to the cut. The cut should be close enough to the bud to reduce the size of the stub of dead wood that will form from the cut, but far enough away to prevent the bud from being adversely affected”

  4. Left Outside

    inyourhouse:

    It would be nice to have a more aggressive monetary policy. But we have zero chance of that happening. You can’t just print money, at the lower bound that won’t produce inflation (hear that people dicussing Mugabe? it won’t) unless you commit future banks to keep the monetary base expanded. Since people don’t expect that then monetary policy won’t get traction. NGDP targeting would be good, and if Cam can introduce it I’ll applaud, but don’t hold your breath.

    That leads deficit spending. Since the UK can borrow at under 4% over 30 years its still actually pretty cheap.

  5. Left Outside

    Billy,

    Plants aren’t relevant. If I cut off your arm, your other arm isn’t going to make up for it is it?

    Cuts are dangerous at the moment, the time is still right for fiscal support.

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