Too many cuts will crash the economy

To be clear, the worst global recession in my lifetime required extraordinary responses from governments and peoples all around the world. In part this meant spending more money nationally despite falling revenues and so of course borrowing went up. In each case where a national government could afford a “fiscal stimulus” this is what was done.
In the UK, additional public spending brought work into a seriously depressed construction industry. It steadied a teetering car industry thanks to the scrappage scheme. And jobs were found for young people through the Future Jobs Fund. And the result? Lower unemployment than in the recession of the 1990′s even though the challenges in the 1990s were less severe. Similarly, home repossessions this time were at half the rate of the 1990s. This time, what we did was civilised, humane and affordable.
Governments that took part – and no government argued against the strategy – expected to have to make serious efforts to repay this extra borrowing afterwards. Most judged that a combination of lower public spending, higher taxes and, crucially, the return of economic growth would restore their public finances to health within a reasonable time.
Across the EU, the subsequent discovery of Greece’s shambolic finances spooked the markets and changed sentiment. At the same time, in the UK the one party to withhold endorsement of the fiscal stimulus – the Conservatives who had urged us to let the recession take its course – now won a senior place in government. Using the Greek experience deftly, they have returned to their “cuts, cuts and more cuts” agenda. It worries me that they make cuts, slash public services, with such evident relish.
Of course a Labour win at the election would also have resulted in cuts in spending. We had said so in our Budget in March and we had legislated to halve the deficit in the national finances in 4 years. But we were not planning a second, emergency budget in 2010 nor a swingeing increase in VAT.
Contrary to some claims by coalition government Ministers, there are no new shocks in the public finances that they have “discovered” upon opening the books.
UK debt as a proportion of GDP was the second lowest of the G7 countries when the global recession struck. Prior to this global meltdown, we met our own rule for keeping this proportion at or below 40% of GDP. Remember when we got in much more than expected from auctioning the third generation mobile phone services licences? We used the receipts to pay down debt even though some argued for additional public spending.
Now the ConDem coalition government’s Budget Red Book puts this proportion at 61.9%. Back in 1932, Neville Chamberlain was criticised for introducing a deflationary budget (there followed a disastrous depression for years) when the proportion of public debt was 177%.
Today, the UK is top of the league when it comes to the time before its debt has to be refinanced. The “average maturity” of the UK’s debt is 14 years. By comparison, other leading industrial countries, including the USA and Germany, have maturities under 9 years. And we are less dependent on overseas finance than other countries. Non-residents hold 70% of Greek government debt, just under 50% of US government debt – but below 30% of UK government debt.
Our ConDem coalition government is offering us bigger cuts in public services, unfairer taxes and putting at risk the economic growth we need. Don’t get carried away by the constant rhetoric about cutting the deficit. Concentrate instead on the size of the risks our ConDems are contemplating taking.

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