I remember being told by a (slightly tipsy) Conservative MP before the election that the Tories’ political strategy, if they won, would be to declare that the state of the economy was much worse than had been expected and then embark on a programme of “Ridley-ite” cuts that would make Margaret Thatcher proud.
And, so far, so true.
The objective, of course, is to make the eye-watering severity of the cuts in public spending seem inevitable and try to blame the previous Government for all that happens.
It is, of course, one of the oldest tricks in the book. I am sure I could find it in Macchiavelli’s “The Prince”, if I looked.
Therefore, it is important that people try and keep hold of a sense of reality and proportion, while David Cameron and George Osborne, plus their faithful assistants Nick Clegg and Vince Cable, attempt their political and economic sleight of hand.
Today’s “Observer” provides a helpful primer for those who want to remind themselves why the Coalition Government is wrong and why there should be no inevitability about the economic cul-de-sac down which George Osborne wants to take us in just over a week’s time.
Katie Allen’s Q&A, “Spending Cuts: Be Concerned but There’s No Need to Panic” has a message that needs to be repeated every time the smug inevitability mantra emerges from the mouth of a Tory/LibDem apologist and I make no apologies for repeating it here:
“Has Alistair Darling really left the public finances in an even worse state than we thought?
The public purse is pretty threadbare, but it is unfair to suggest Darling left hundreds of skeletons to tumble out of the cupboard – and the former chancellor takes the idea as a personal affront. The figures bear him out: the latest official statistics showed a massive tax windfall at the end of the financial year to April, and as a result the deficit was revised down by £7bn. In fact, it is now £11bn below Darling’s final budget forecast.
Is there no alternative to drastic cuts in public services?
The fact that the deficit figures are not quite so horrific in itself raises questions over macho austerity policies and the £6.2bn of cuts already announced. Yes, we do need to bring the deficit under control, but too much austerity too soon could strangle a fragile recovery.
But won’t my tax bill go up if we don’t cut spending?
There will be a mix of spending cuts and tax rises. One of the big issues is getting the balance right between the two. Concentrating too heavily on cuts could hurt the vulnerable in society, but hefty tax rises, particularly on high earners, can be self-defeating because people avoid paying.
If we don’t tighten our belts enough, won’t our debts run out of control?
People tend to think that the government debt is like a household debt and needs to be managed very tightly. But as Leslie Budd at the Open University Business School says: “This… belongs to the less well known branch of economics called Ignorance Economics.” It is sensible to cut waste, but slashing spending indiscriminately to deal with fiscal crises can do more harm than good. Public spending is an injection into the economy that boosts national income and employment.
Hold on, though, didn’t David Cameron say our debt interest was rising to £70bn a year? That sounds bad.
Yes, it’s certainly not a good place to be. Debt service payments are set to rise from £41.6bn pencilled in this year to about £70bn in five years’ time. It is, as Cameron says, “a terrible, terrible waste of money” and more than the combined budgets for education, climate change and transport. But it is not a new figure and, to put it in perspective, households spend a similar amount of their income servicing their debts and many companies spend far more. Also, it’s not unusual for any country to spend a large part of its revenues on servicing debts.
But I heard that we are in a worse position than Greece.
Nowhere near. Britain has never defaulted on its national debt. Our debt has a long time to run, with an average of 14 years to maturity, twice as long as most European countries, including Greece. In simple terms, that means the UK government needs to refinance less of its debt in any given year and is less sensitive to rising interest rates.
Hmm. But I also heard Cameron say we are “indebted on an unprecedented scale”.
This is the kind of phrase that enrages economic historians. Some context is needed. On paper, the deficit of £156.1bn for the last financial year is indeed the highest since records began at the end of the second world war. But as any economist will tell you, it’s not hard for any nominal figure to be a record after more than 60 years of inflation.
So that’s all right then?
Debt has been higher than this at many points in wartime and peacetime since the creation of the national debt in 1690, according to Glen O’Hara of Oxford Brookes University. The 18th century saw particularly large increases in the size of the armed services and each successive conflict saw public debt peak at a new high. The level of our debt is a cause for serious concern, but not panic.”