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
Anon
I think you’re stretching it a bit claiming a majority of the electorate voted for these ‘pet projects’. We all know that many lib dems vote to keep the tories out and don’t share their views on many things. One of these is certainly the married tax allowance. Which is why the LibDems are being allowed a free vote on it (at least that was the last I heard).
Yes, Labour lost. But so did the Con Dem Libs, separately.
Having joined together so they could take the power they didn’t actually get individually, they can now use terms like ‘compromise’ to justify breaking their pre-election promises or introducing previously unmentioned ideas. Or, as I heard recently ‘we were always saying the same things, just in a different way’.
Mr. Sensible
Jacquie you hit the knale on the head.
How must, say, a voter who voted Lib Dem in a Lib-Con marginal to keep the Tories out feel now?
And as I think you’re hinting at in your last remarks, to go with the compromises (most of which are coming from the Lib Dems), there are these bombshells that weren’t in either manifesto, such as the 55% supermajority nonsense or granting anonimity to defendents in rape cases. Or at least that was proposed in the coalition document…
http://www.guardian.co.uk/society/2010/jun/07/nick-clegg-rape-anonymity-back-down
Jacquie Martin
Mr Sensible
Thank you for providing the link to the rape anonymity article – another of my little chestnuts. I hadn’t read this today and am pleased to learn they’re listening to the experts. Of course, there were subsequent events that have had a bearing on this conference motion of four years ago which may have forced this climbdown.
This all smacks of ‘one for me, one for you’ bartering which is hardly the way to do serious governmental business.
They were in deep water with this one and I suspect they’ll also be some rethinking on the 55% majority, which a lot of people see as unnacceptable.
Mr. Sensible
The issue of anonimity for defendents in rape victims is complex.
I would be interested to see if 1 of LFF’s writers or a guest writer would write an article for LFF on this.
Shamik Das
Mr Sensible, in the Commons right now they are debating “Anonymity of rape defendants” – this is a most serious debate; remember Austen Donnellan or Quinten Hann? As justice minister Crispin Blunt has just said, “[policy] must be based on evidence, not supposition”. If you get a chance tomorrow, try and get hold of the footage, maybe on the iplayer, or look it up in Hansard.