I used to think more cuts were the answer. But not any more

Cut less to achieve more: that's the only course after two years of failure on debt and the deficit.

Share

Many people feel torn on big economic questions.

The arguments are often complicated, so they look at the politicians on each side and back the ones they trust the most – or distrust the least. It’s comforting to be surrounded by kindred spirits. Sometimes, though, a little voice starts to intrude, saying, “Hang on a minute. This doesn’t feel quite right.”

That happened to me in the late 1980s. I’d always been instinctively cosmopolitan, internationalist and hence pro-European. So when the pro-European political establishment – Labour, the Lib Dems and the less nutty Tories – said it would be a good idea for Britain to join the Exchange Rate Mechanism (ERM), I instinctively sided with them.

And then the little voice of logic started to intrude. I realised that this artificial alignment of very different economies was going to end up like a Procrustean bed: those that were too long to fit would have their feet chopped off, and the others painfully stretched. There was no way that one size would fit all in the ERM – and even less so in the euro.

The trouble was that the only politicians saying this were on the far right of the Tory party. And most of them were anti-European. These were not my people. They were far from kindred spirits. But the awful truth was, they were right. So I backed my head rather than my heart, and within a few years I was helping to lead a public campaign against Britain joining the euro.

A decade or so later, many of us feel the same internal wrangling, this time over how best to deal with the deficit. I used to be infuriated by Gordon Brown’s refusal even to say the word “cuts”. So when the Coalition, in 2010, said it would eliminate the structural deficit in one Parliament and bring total debt down by 2015, my instinct was that these people were serious, and it had to be done. It would hurt, but it would work.

After a few months, though, the little voice came back. What if it hurt but didn’t work? What if the cuts took so much growth out of the economy that they would be self-defeating? In a column in August 2010, I wrote, “If tax revenues fall, we could end up with large spending cuts, a spiral back into recession and a deficit just as big as it was before. That would be the worst possible outcome both for the country and for the Coalition.” And so it has proved.

I argued that the Tories could have pacified the markets with less stringency. They could have promised, say, to cut the deficit by three-quarters in one Parliament instead of eliminating it. That would have sounded more serious than Labour was, and markets were anyway more likely to trust Conservatives.

It may seem odd to argue that cutting less could have had more effect on the deficit. It’s counter-intuitive. But the mistake is to think of the national economy as a household. If I’m in debt, the more I cut my spending, the more quickly I’ll pay off my overdraft. It’s not so simple when you’re a government, because so much of the rest of the economy depends on your spending.

When government cuts spending, jobs go, companies lose business, people have less in their pocket. There is also a dampening effect on business and consumer confidence, so both are more reluctant to spend. And if growth shrinks, so do tax revenues, so the deficit doesn’t narrow. It’s as if, to go back to the household example, my spending cuts also hit my income, so my overdraft remains the same. In both cases, everyone is worse off, with no corresponding reward from lower debt.

Of course, economists disagree about the extent to which government spending affects growth. It’s called the multiplier effect: a multiple of one means that the economy shrinks by £1 for every £1 cut in government spending. Until recently, the consensus was that the multiplier in the UK, after taking account of the boost to the economy from a looser monetary policy, was about 0.5, which meant that although austerity would have some bad effect on economic growth, it could at least make inroads into the deficit. With that multiplier, the IMF calculated that the spending cuts had reduced our GDP by 2.5 per cent in the two years after the election.

Now, however, after two years of failure on debt and the deficit, it is time for a reassessment. And sure enough, in October the IMF admitted that its estimate of the multiplier had been far too low. Far from 0.5, it was more likely to be between 0.9 and 1.7. That suggests that the hit to our GDP from austerity has been at least 4.5 per cent, possibly much more. No wonder tax revenues have fallen so much. No wonder the underlying deficit is as big as it was in 2010 if you exclude the one-off boost from selling off the 4G spectrum.

Even the Office for Budget Responsibility has changed its mind. In a little-noticed section of its report on Wednesday, it argued that the problem in the UK economy is not one of supply, as it used to think, but a deep shortfall in demand. That demand isn’t going to come from exports to other countries, as yesterday’s dreadful trade figures showed. So it can only come from personal spending, government spending or business investment in this country.

Businesses won’t invest while the demand for their goods is so low. People won’t and can’t spend when their wages and benefits are falling in real terms. The only way to boost demand, and therefore growth, is for government to delay some of its austerity and start building roads or cutting taxes.

It won’t affect our borrowing costs. Our AAA rating is likely to be downgraded anyway because of our lack of growth; and we will still be a safer haven for investors than the eurozone. What it will do is give our sickly economy a boost, which should, in turn, increase our tax revenues and turn a vicious circle into a virtuous one. And if that puts me closer to the camp of Ed Balls, I shall just have to swallow hard and put up with it.

Twitter: @MASieghart

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
iJobs Job Widget
iJobs General

Recruitment Genius: Project Assistant

£17000 per annum: Recruitment Genius: They are a leading company in the field ...

Recruitment Genius: DBA Developer - SQL Server

£30000 - £35000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Office Manager

£26041 - £34876 per annum: Recruitment Genius: There has never been a more exc...

Recruitment Genius: Travel Customer Service and Experience Manager

£14000 - £17000 per annum: Recruitment Genius: The fastest growing travel comp...

Day In a Page

Read Next
A pack of seagulls squabble over discarded food left on the beach at St Ives on July 28, 2015  

Number of urban seagulls in Britain nearly quadruples: Hide food and avoid chicks to stay in gulls’ good books

Tom Bawden
 

Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice
Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks
The haunting of Shirley Jackson: Was the gothic author's life really as bleak as her fiction?

The haunting of Shirley Jackson

Was the gothic author's life really as bleak as her fiction?
Bill Granger recipes: Heading off on holiday? Try out our chef's seaside-inspired dishes...

Bill Granger's seaside-inspired recipes

These dishes are so easy to make, our chef is almost embarrassed to call them recipes
Ashes 2015: Tourists are limp, leaderless and distinctly UnAustralian

Tourists are limp, leaderless and distinctly UnAustralian

A woefully out-of-form Michael Clarke embodies his team's fragile Ashes campaign, says Michael Calvin
Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen