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.
36 Responses to “Growth, not “painful” cuts, will lead to deficit reduction”
StephenH
inyourhouse:
I’m all for targeting higher inflation to eat away at debt. The OECD, BOE, the City and the Tories are absolutely dead set against this. I’m fine with QE carrying on too but I see no point in negating it by removing govt spendign from the economy. This sounds like a recipe for lower growth and tax receipts.
As Martin Wolf (FT economist not politico) points out
“Above all, the private sector is forecast by the OECD to run a surplus – an excess of income over spending – of 10 per cent of GDP this year. On a consolidated basis, the UK’s private surplus funds nearly 90 per cent of the fiscal deficit. Thus, fiscal tightening would only work if it coincided with a robust private recovery. Otherwise, it would drive the economy into deeper recession. Yes, that is a Keynesian argument. But this is a Keynesian situation.”
AnonEMouse
on the 500,000 jobs saved, who says that?– well the IMF said that, their higher estimate being based on the depth of the recession and the unemployment level from previous recessions.
Robert
I’m willing to give the Tories the chance, if they fail we can always ask brown to come back, or not.
I think cuts have to come, we cannot go on like this, but as people say cut to much you can damage the country, do not cut and look out
Anon E Mouse
Robert – I’m with you on giving the coalition a chance – we’re all living through the legacy of Labour overspend and regardless of what the cut’s are if Labour had been financially responsible we wouldn’t be in this mess.
Listening to Brown when he said cutting waste would damage the recovery was as stupid as believing he’d ended boom and bust – the man was reckless with other peoples money and now we all have to pay it back. Thanks Labour…
StephenH
AnonEMouse
‘if Labour had been financially responsible we wouldn’t be in this mess’
Our deficit prior to the crash was < 3% of GDP. Its now heading for 10-11% because of the crash and the reduction in tax revenues. Not becauseo fan y growth in spending.
….actually why am I bothering– you are clearly immune to figures. Forget it– just believe what you clearly want to believe.
DevonChap
StephenH: “Our deficit prior to the crash was < 3% of GDP.". Nothing to be proud of Steve. Running a budget deficit in good times? Not very Keynesian. What with ending of the housing bubble and the banks having ongoing problems that structural 3% GDP deficit in good times is now 6%. Growth won't fix that in a hurry.