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”
Anon E Mouse
StephenH – Leaving aside PFI, the Labour government BORROWED money in the good times instead of paying down the debts.
Fact’s are fact’s irrespective of immunity to figures…
Billy Blofeld
@Left Outside,
The point is, that the economy like a plant can re-grow after cuts and that cutting back the deadwood promotes growth. My arm can’t do this trick – unless I become a starfish – which I refuse to do.
Will Straw
Very interesting debate a few thoughts:
1) Almost all of the <3% deficit that Stephen refers to was caused by capital spending. The Government's fiscal rules stated that "borrowing to invest" was acceptable. At that stage we were growing at a sufficient level that the non-current deficit was made up by growth so the overall debt/GDP ratio was not changing. The problem was (i) no-one saw the recession coming, and (ii) we should have been running a surplus on current spending.
2) Some spending cuts will be necessary (who really mourns the loss of ID cards?) but sequencing is key. If we start cutting too soon, it could send the recession spiralling into double dip and the deficit spiralling as the resulting job losses push up unemployment benefits. As we found at two weeks ago, Cameron never had £6bn of efficiency savings. The Labour government was already engaged in £15bn of efficiency savings so the £6bn that Osborne & Laws found was largely spending cuts (eg to the child trust fund, university places, etc).
3) The 12% deficit is caused by a mixture of public spending spiralling because of the bail-outs and automatic stabilisers, and declining tax receipts (now down to 36% of GDP). Unless you are arguing for a state that is 15% smaller than before the crash (ie 42% down to 36% of GDP), we need to have some additional tax rises. Capital gains, National Insurance, and tackling tax avoidance are all ways to realise this.
Anon E Mouse
Billy Blofeld – I think you are quite within your rights not to turn into a starfish if you don’t want to dude…
Mr. Sensible
Nice to see a bit of common sense at long last from the Daily Torygraph.
I think it is very telling how, as I said last week, the Guardian reported that when Fitch’s cut Spain’s credit rating they said that austerity measures were having a negative impact on growth.
And if Cameron’s saying that we need to make these cuts, why oh why is the coalition still trying to justify protecting their pet projects?
This might sound repetitive, but if we cannot afford to keep the Child Trust Fund, we cannot afford the Tax Break for Married Couples.
If we cannot afford to keep BSF, we cannot afford ‘Free Schools.’ I notice that there was a damning article on this in Yesterday’s Observer:
http://www.guardian.co.uk/education/2010/jun/06/academies-michael-gove-poorer-children
It is not the Child Trust Fund, BSF, 10000 additional University Places ETC that are waste; it is the Coalition’s Pet Projects that are waste.
And if we throw hundreds of thousands on the dole, that won’t cut unemployment and will add to the deficit.
And the fact is that parts of the Private Sector are in fact dependent on Public Spending; BSF is a case in point.
And Cameron says that these cuts are not about ideology, in which case, again, how can he afford things like Free Schools? I read a Guardian article a few weeks ago which suggested that the coalition program had added an additional £10 billion to the deficit.
Which shows again that these cuts aren’t about cutting the deficit; they are about ideology, and could in fact harm growth.