Debate rages over the ‘unavoidable’ budget

The consistently repeated dictum from the Treasury and government front benches over the last several weeks is that the coalition’s June budget was a product of necessity rather than a consequence of ideology.

The consistently repeated dictum from the Treasury and government front benches over the last several weeks is that the coalition’s June budget was a product of necessity rather than a consequence of ideology. Last night’s Smith Institute event, ‘The Unavoidable Budget’, dealt with the substantive facts of the budget and analyses the extent to which the new government’s reforms could reduce the deficit.

It also focused on the extent to which this budget is a product of politics over policy and whether for the ‘fiscal right’ the June budget was a moment not born of economic necessity but instead a child of political opportunism.

Hosted by the Guardian’s economics editor Larry Elliot with input from academics Chris Wales and Professor Michael Devereaux as well as Lord Newby and MPs Kwasi Kwarteng and Stephen Timms – financial secretary to the Treasury from 2008-2010 – several points were raised.

Firstly, while the left continually points to the budget as regressive and hitting the poor hardest – primarily through reductions in housing benefit and an increase in VAT – what is too often missed is that it represents a bigger gamble by the right on their ‘less-state-is-better’ world view than anything under Thatcher.

On job creation in the private sector and on economic growth within a context of continued flatlining among our European neighbours the figures are incredibly optimistic, almost irrationally so, as the Financial Times’s Martin Wolf has commented elsewhere:

“This gamble has now defined the government. If it is seen to have failed it will be finished.”

For most of the speakers the ambition to eliminate the deficit by 2015 is simply unachievable and according to Professor Michael Devereaux the coalition will at some point “realise that a 50/50 ratio between tax increases and spending cuts is probably the only feasible path the public is willing to accept in tackling the deficit”.

Not only is the current ambition as set out in June of a ratio of 77:23 of spending cuts to tax split irrationally optimistic on private sector job creation, according to Deveraux it also has little real consent among the electorate – by this time next year expect the current ‘silence on the doorsteps’ to be replaced by the vocal realisation of how reliant we all are on public spending.

This reflects the recent analysis of the Institute for Fiscal Studies which claimed that:

“In total, the cut in central government public services spending as a share of national income now planned by the coalition will more than reverse the entire increase we saw under Labour. We are looking at the longest, deepest sustained periods of cuts to public services spending at least since World War II.”

It is indeed remarkable that such a reduction in public spending can be put into action without any serious debate with the electorate about the right balance of spending cuts and tax increases.

Secondly, the panel was clear that the scale of the cuts to the public sector are too deep for any economy in the early stages of a recovery. While it was wrong of the previous Labour government to borrow during the ‘good times’ to pay for improvements in public spending (Keynes most certainly never argued for this), now is most certainly the time for, if anything, greater counter-cyclical spending by the state to raise aggregate demand and get the economy moving again.

Here Larry Elliot repeated his call for the efficacy of a ‘Green New Deal’  that would prospectively elevate private side economic growth over the coming years facilitating a more balanced reduction in state spending and a more growth-centric deficit reduction plan.

For Keynesians (and Larry Elliot is certainly one of those) the scale of these cuts in the current context aren’t just bad, they are utterly ludicrous – reducing state spend by such an extent so quickly genuinely raises the prospect not only of a double-dip recession but of a Japanese style ‘lost decade’ of zero growth, coupled with high unemployment of potentially more than three million and increasingly ill-funded public services.

In the medium term this budget genuinely damages prospects for growth and it is growth that really matters in cutting deficits, as business secretary Vince Cable himself said in June:

“Fiscal stabilisation will only be successful if it leads to growth.”

George Osborne has chosen to frame the debate around how the country cannot afford existing levels of state spending, placing a huge emphasis on spending cuts over tax increases. The Smith Institute believes that inevitably this will prove problematic and that the public will become increasingly frustrated with such drastic changes to public services and the tax and benefits system. The challenge for Labour in the short to medium-term therefore will be to reflect such critical public sentiment.

In the Nineties Labour won the debate about the need for higher levels of public spending; the problem was the party never really sought to gain consent about how to pay for them. If we are to stand against these cuts we must do so advocating higher general taxation and a ratio of 50:50 public service cuts to tax increases.

According to the Smith Institute this would not only be a saner, more achievable position in reducing the deficit than as set out in the June budget, but will also in time broadly reflect public opinion. Indeed such a position would represent sane economic policy and sound politics, two things notably absent at HM Treasury in recent times.

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