Last summer the British political and media consensus was pretty overwhelming. The deficit was the only issue that mattered in the economic policy. The draconian measures set out in George Osborne's emergency Budget were not just necessary but essential to secure economic recovery and keep unemployment falling. There was no alternative to the rapid timetable for deficit reduction that he set out. Anyone who questioned this consensus – or dared to suggest there was a different way to get the deficit down – was labelled a "deficit denier".
How times have changed. In Davos last week we heard the same international bodies and central bankers who ushered Ireland off the cliff maintaining their endorsement of George Osborne's plans. But more objective, less ideological voices – from George Soros to Paul Krugman – are now joining a growing band of UK economic commentators and urging him to re-think. Now it is George Osborne who seems to be in denial.
The contrast with the US economy is instructive. On Friday, we saw the strong figures for US growth in the fourth quarter of last year. Economic recovery is necessarily difficult and takes time after a major global financial crisis. But the US Treasury, by combining sustained and sensible stimulus for an economy still in recovery with a measured and steady pace of deficit reduction, has seen confidence grow and consumer spending rising.
As the US Treasury Secretary said in Davos, rapid and drastic spending cuts "are not the responsible way" to cut national deficits and "education, innovation and investment" were the way forward.
Last Tuesday, in sharp contrast, we saw shocking UK growth figures for the fourth quarter of 2010. Not growth rising, as in the US, but grinding to a complete standstill. And while George Osborne insists it was the Big Freeze in December that caused the contraction, it is the impending Big Squeeze on family budgets and public services that is driving the collapse in confidence and holding back investment.
The fact is that the US Treasury Secretary is right and George Osborne is wrong. In the US, there are still big risks and challenges ahead. But supporting job creation, reforming our financial systems and investing in jobs for the future is the best way to get economies moving again and to cut the deficit. Simply slamming on the brakes with drastic tax hikes and deep spending cuts is not a credible economic policy.
That is why here in Britain we need to re-think. There is an economically more credible alternative to what this Conservative-led Government is doing.
We need a plan that puts jobs and growth first. That's why Ed Miliband and I are demanding a repeat of last year's £3.5bn bank bonus tax to invest in growth and job creation this year, alongside a slower, steadier pace of deficit reduction. As Ed Miliband rightly said at Prime Minister's Questions this week, without growth you can't get the deficit down.
So why is George Osborne being so stubborn – seeming to be in denial about what is happening?
Part of the reason is that the consensus in Britain is always hard to duck. Don't forget that it was the consensus view at the time, that the UK had no choice but to re-join the Gold Standard in 1925 and to join the Exchange Rate Mechanism in 1990. Both decisions which turned out to be catastrophic in retrospect were supported by both sides of industry and both sides of politics too.
That is why I argued in my Bloomberg speech last summer that history teaches us always to be wary when any British economic policymaker tells you there is no alternative to the course ahead. Adopting the consensus view may be the easy and safe thing to do, but it does not make you right and, in the long-term, it does not make you credible.
Both George Osborne and Prime Minister David Cameron have responded in recent days by saying it would be weak to change course just on the basis of one quarter's figures. And it is certainly far too early to tell whether rising unemployment and economic stagnation will continue in the coming months.
But economic policy-making is about managing risks and preparing for all eventualities. My main criticism of George Osborne last August – and today – is that he appears complacent, even carefree, and in denial about the risk to jobs and growth, with no apparent concern over the impact of his tax rises and spending cuts. There is no historical precedent to support his projections and he has no Plan B if the scale and pace of his deficit-cutting prove to go too far and too fast. This is not a wise approach to running the economy.
But there is a third reason why George Osborne is being so stubborn. The outgoing head of the CBI Richard Lambert captured it well, earlier in the week, when he said that "politics appear to have trumped economics on too many occasions over the past eight months".
There is no doubt that George Osborne is a highly-skilled political strategist – unmatched in today's Tory party. And the political strategy he is implementing is straight out of the Margaret Thatcher 1980s manual: impose as much pain as you can straight after the election, raise taxes, cut spending, slash benefits, make people feel lucky to have a job, build up your war-chest, and then cut taxes just before the election, win a majority, and start all over again. He is following Mrs Thatcher's strategy to the letter – right down to the immediate hike in VAT, even if it breaks a pre-election promise.
But this strategy is irresponsible, and dangerous. Two decades ago our country paid a very high price because of the economic mistakes of the 1980s recession and the years of slow growth and rising unemployment that followed. Manufacturing capacity was lost permanently. A whole generation of young people saw their lives blighted by long-term unemployment. Our society was divided, child poverty soared and our infrastructure decayed.
So when I hear George Osborne refuse even to countenance the idea of a Plan B, I can see no economic judgement at work at all – just a political gamble with the nation's economy. We have a Chancellor shaping his economic plans around a fixed political strategy to win an election in 2015 and cut the size of the state – outweighing his constitutional responsibility as Chancellor to adopt a cautious approach rooted in sound economics to protect jobs, growth and homes. We badly need an alternative – and we need it now.
Ed Balls is the Shadow Chancellor