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”
Jacquie Martin
Will, you beat me to it on point 3.
For anyone who’s really interested in finding alternative ways to tackle the deficit – Richard Murphy’s blog at Tax Research UK (link under domestic progressives) has some excellent papers detailing ways to maximise tax revenue. As a former investigator for HMRC (nothing you say can hurt me), who took voluntary redundancy in 1997 because we were not being allowed to do the job we were trained for, I can vouch for the authenticity of many of the papers’ claims.
Also, it is usual practice for governments to blame their predecessors for unwelcome measures. However, Cameron did not inherit worse than he first thought. The deficit figures show it was actually better but that doesn’t sound so good, for him, that is.
On that point, let’s remember Cameron is an ex-PR man. He is painting the bleakest picture possible, so he can take the credit for ‘turning it around’ when he ‘finds’ he doesn’t have to cut something which would make him incredibly unpopular. Note he is giving no details to support anything he says at the moment – saving a little something for a positive spin, I suspect.
All governments borrow money, as do all businesses. Cameron will have to as well. Unfortunately he hasn’t realised that you have to show you can pay it back. Maybe he’s never had to borrow. If he damages growth, he damages our credit prospects. Then we are in big trouble. If he can’t borrow, he’ll have to raise it through tax. Then he will undoubtedly use the sledgehammer over the head method, rather than the maximisation of what we already, in theory, have (see above).
Billy Blofeld
“a state that is 15% smaller than before the crash”
If only………..
Mr. Sensible
Jacquie I fully agree with you.
Your point about possibly damaging our credit prospects is highlighted by what’s happened in Spain following Austerity measures.
Lets remember, it is the banks and the City that got us in to this mess. And now the City is trying to take Britain down with it.
And Clegg uses what’s going on in the Eurozone as an excuse; the situation in Grece isn’t exactly new, is it?
Anon E Mouse
Mr.Sensible – Those “pet projects” were voted for by a majority of UK electorate. I guess to you Mr.S, democracy sucks huh?
Irrespective of how you feel it went in Nottingham, Labour lost…
Mr. Sensible
Mr Mouse, as I said I think yesterday in response to that, if the Liberal Democrats had gone in to coalition with Labour we would be saying the same thing.
This is the big thing with coalition politics; the parties involved can get something together and claim it has a mandate.
David Cameron said that if you want to see a Tory government look at our councils.
Judging by their performence here, he couldn’t have been more correct if he tried.