Leading article: A welcome sign of realism on government spending

The Chancellor's speech signals an important change of approach
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The Independent Online

Yesterday Gordon Brown's favourite political dividing line of Labour "investment" versus Tory "cuts" officially expired; or at least became radically more nuanced. The Chancellor Alistair Darling, in a speech to business leaders in Cardiff, argued that "hard choices" need to be made on the funding of the public services. Government will need to "cut costs" and "non-essential public sector assets" will have to be sold.

No longer is the Government pretending that voters have a clear choice between spending increases under Labour and painful cuts under the Conservatives. The message of the Chancellor's speech was that, even if Labour wins the next election, reductions in public spending await.

We should welcome this change of approach, which is, by all accounts, the result of pressure from the increasingly assured Mr Darling. The present deficit (forecast by the Treasury to be £175bn in 2009) is unsustainable. Tax rises can bridge some of the gap, but reductions in public expenditure will also be necessary if stability is to return to the public finances. International investors in British government bonds need some reassurance that ministers recognise they cannot indefinitely mortgage the nation's future. Otherwise they will begin to demand punishing premiums on their loans and effectively take control of public spending out of ministers' hands.

Of course, Mr Darling unveiled no specific proposals on where state expenditure might be trimmed. Such details are unlikely to emerge before the Pre-Budget report in November. Until then, it is impossible to evaluate the Chancellor's assertion that Labour's cuts would be more humanely chosen and applied than those of a Conservative government. But we should be grateful that there is now at least some recognition from the Government that Britain needs to make serious efforts to reduce the deficit over the medium term.

Yet the timing of this fiscal consolidation needs to be handled with care. As crucial as the need for realism from ministers on state spending is the imperative that any cuts are not implemented too hastily. A combination of government deficits and monetary easing around the world has prevented a repeat of the catastrophic global economic slump of the 1930s. But despite the multiplying signs that the global economy has edged away from the abyss in recent months, the job of governments in this crisis is far from over.

If states remove the various forms of support for their economies too early there is a risk they will throttle the modest increases in output that they are seeing (or, in the case of the UK and the US, are expected to see soon). The result could be to make the public sector debt burden still greater in relation to the size of national economies. When there are unambiguous signals that private sector companies around the world are driving economic recovery, that will be the time for states to start implementing "exit strategies". Until then, governments and monetary authorities need to remain in crisis mode.

It is understandable that politicians and the public are nervous about the danger of deficits getting out of hand. But they should be just as nervous about the dangers of growth collapsing again or output remaining flat for a prolonged period. This is the balance that responsible politicians of all parties need to strike. It is also the complex economic reality that they need to communicate to the general public. Yesterday's speech from Mr Darling was but a small step on that journey.