Steve Richards: The deficit slashers are plain wrong

Economic hawks, like the warmongers of 2002/3, act from a dangerous mix of conviction and crude political calculation
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The way the Government is attempting to manipulate voters into accepting savage spending cuts reminds me of the build-up to the war in Iraq. There was then, and is now, an attempt to create a sense of unavoidable inevitability. I would not be surprised if, once the avoidable has taken place in relation to the economy, the post-mortems will have a similar ring to those that took place after Iraq. After the second recession takes hold we will ask: how was it allowed it to happen? Why did no one argue for an alternative route when history provided a thousand warnings of the dangers? Those powerful voices in the media arguing for the fashionably orthodox position that swingeing cuts are desirable and unavoidable will switch without a moment's hesitation to becoming critics of such a policy, as pro-war commentators managed to do when warnings from despised opponents proved to be correct.

I thought of Iraq when the first conclusions of the Office for Budget Responsibility were reported with breathless excitement. Sir Alan Budd, its chairman, is a distinguished economist. If he had written a stimulating article in which he predicted growth would not be as high as previously forecast I am sure it would have been read with interest by those eager for his latest take, but that would be the limit of his capacity to make waves. The fact that Chancellor George Osborne has appointed him to a new office means his forecast on the previous forecast is seen as a tablet of stone and more ammunition for deep cuts.

This is absurd. Nearly all forecasts are wrong. Sometimes the Treasury got it right and independent forecasters were wrong. Sometimes the reverse was the case. The danger is when the guesswork feeds on itself. So when a new Office predicts much lower growth, lower growth becomes a little more likely. In this case the prediction is not especially surprising when the Government plans to take billions out of a fragile economy.

Yesterday's contrived scare follows David Cameron's predictable speech last week about the economy being even worse than thought, despite borrowing figures being a few billion pounds better than predicted. Nothing must detract from the Government's desired narrative. These manoeuvres are the equivalent of the Labour Government's dossier on the weapons of mass destruction Saddam was supposed to have possessed. They are framed to create the impression of fearful, serious purpose. The economic hawks, like the warmongers in 2002-3, act from a dangerous mix of conviction and crude political calculation.

As in the build-up to Iraq, anyone who questions the orthodoxy is dismissed as reckless. Labour candidates in the leadership contest who oppose the coalition's cuts strategy are written off as playing to the gallery and steering their party towards electoral oblivion. Robin Cook was widely seen in a similar light as he contemplated resignation from the Cabinet when Tony Blair and George Bush sped towards war. Any alternative route is seen as freakish and unrealistic, as it was with Iraq.

Yet the coalition is acting more dangerously than the tiny handful at Westminster and in the media who dare to question the wisdom of their course. Let us pause before this transitional moment passes and we return to recession. Treasury orthodoxy is nearly always determined by a recklessly cautious pessimism. The memoirs of former chancellors are punctuated with regrets that they followed the advice of Treasury officials that subsequently proved to be too gloomy. Bond markets are not in a state of determined anxiety about the level of debt in Britain. The economy is growing in spite of the near collapse in the financial markets.

Borrowing is less than was forecast, is at a rate any individual would dream of, and prevented a longer recession. This is not the 1980s, when in a limited and unbalanced way an economy was kick-started by falling interest rates, a depreciating currency and the arrival of North Sea oil. This is not Canada in the 1990s, when the next-door American economy was booming and a much higher proportion of spending took place at a local level.

There is a pragmatic, less headline-grabbing path towards recovery, as there was an alternative to war in Iraq. The coalition here has declared that a high proportion of the deficit should be re-paid by spending cuts compared with tax rises, a ratio of 80:20. That is an arbitrary split and never fully explained. Tax increases are a quicker way of raising revenue as well as being fairer. The introduction of more co-payments would maintain the quality of services while raising revenue, another alternative to cuts. Crude spending cuts often costs money in the short-term, in terms of redundancy packages and benefit claims, so there are sound economic reasons for moving at a flexible pace rather than one of headline-grabbing speed.

I recall Vince Cable telling George Osborne in a debate on the economy a couple of years ago that during the Second World War the Government did not announce it was so worried about debt it would stop fighting. Winning the war was the single priority. Cable argued this was an economic war. He must know it is not over. Around the same time, Chris Huhne told me in an interview that the response to the crisis highlighted the most important divide in politics with Cameron and Osborne on one side and the Lib Dems/Labour on the other. They are the only economists in the Cabinet – and understand that while the deficit must come down, it's not as simple as the populist hawks believe.

Historians of the Iraq war are asking already why the Cabinet did not do more to stop Blair. The answer is that they did not want to stop him and viewed Cook with misjudged lofty disdain. I do not blame Huhne and Cable for sitting tight a month into the coalition, but let us hope at some point they try to put a stop to this reckless grandstanding populism dressed up as noble prudence.

Blair expected to be popular after the Iraq war, looking forward to the so-called "Baghdad bounce". He got the shock of his political life when there was no bounce. Partly Cameron/Osborne act with the next election in mind, noting other leaders who cut spending early and went on to win. But the past is no guide. A country that gave Thatcher a landslide after the Falklands halved Blair's majority after Iraq. A country that gave Thatcher a second landslide after the economy started to move briefly into surplus will turn away from the coalition when the economy moves into another recession following an axe wielded too deeply and with impatient speed.

s.richards@independent.co.uk

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