The voices of warning are multiplying. At the World Economic Forum in Davos last week the respected financier George Soros predicted that George Osborne's ambitious deficit-reduction plan would prove unsustainable. This was followed by some hints from Larry Summers – who until recently was Barack Obama's chief economic adviser – that withdrawing demand from a still weak economy was unwise.
The National Institute for Economic and Social Research (NIESR) went further this week, directly urging the Chancellor to slow the scheduled pace of cuts. And yesterday the Institute for Fiscal Studies (IFS) warned that the planned fiscal retrenchment would be "formidably hard to deliver".
True, the IFS, unlike the NIESR, does not recommend that Mr Osborne change his fiscal plans. But it does argue that the risks to the economy are greater than Mr Osborne admits. And the IFS's director, Carl Emmerson, yesterday suggested that the Chancellor should prepare a "Plan B" in the event that the economy does not rebound as the Government hopes it will.
The Chancellor regards these as siren voices that would lure him on to the rocks of destruction. At Davos last week he argued that that if he were to deviate, or show any signs of deviating, from the course outlined in last year's Budget, investors in British debt would panic and send interest rates soaring.
But he should listen to the warnings. For one thing, they do not come from the political left, but from economic technocrats. For another, their fears are well founded. Mr Osborne has cited support from the Bank of England and the International Monetary Fund for his existing approach. But the growth figures for the final quarter of 2010, even allowing for the weather disruption, suggest an ominous weakness in the British economy. Manufacturing is recovering well. But consumer confidence has fallen drastically. And since the cuts have not yet started in earnest, there is every reason to be pessimistic about the recovery. Even if one views things optimistically, it would be imprudent for Mr Osborne not to take out an insurance policy, in the form of a commitment to loosen fiscal policy if it appears that cuts and tax rises are inflicting an intolerable squeeze on growth.
Mr Osborne says foreign investors in British government debt want to be confident that the Government will do what is necessary to reduce borrowing. Indeed they do. But if growth does not rebound strongly, the deficit will not come down and borrowing will remain high. Why should investors be impressed by inflexibility from Mr Osborne if that very inflexibility threatens to push his stated objective further away?
The Chancellor's fears about Britain's leeway for flexibility are exaggerated. The IFS emphasised yesterday just how drastic Mr Osborne's fiscal consolidation is by international standards. Only Greece is implementing quicker and deeper cuts to its structural deficit. Britain is not Greece. Our sovereign credit is much more secure. There is no good reason to believe that investors would panic if the Government were to announce a more flexible approach.
Of course, there is another reason why Mr Osborne would be loath to alter his plans. Any change of approach would be a personal humiliation. Labour's new shadow Chancellor, Ed Balls, would ruthlessly exploit this reversal. But one politician's pride cannot be allowed to drive policy; not with hundreds of thousands of jobs and livelihoods at stake. It is now increasingly clear that Mr Osborne's emergency Budget last June was a reckless, indeed hubristic, document. The Chancellor will deliver his second Budget next month. He should swallow his pride and announce a contingency plan.Reuse content