This is one of those watershed budgets where the governing party tries, not simply to make budgetary adjustments to the nation’s finances, but to change profoundly the ideological underpinnings of the State itself. But the whole project is built on a string of fundamental myths which give an almost surrealistic atmosphere to today’s proceedings. Here are the main myths.
- The financial crash and economic downturn have been caused by Big Government, not by the markets,
- The budget deficit is out of control, and if not brought rapidly under control it will lead to disaster like the Greek collapse,
- Excessive public spending is the central cause of the problem, and needs to be drastically cut back,
- If the public sector is cut back to a much smaller size, the suppressed private sector will emerge to fill the space as the engine of sustainable expansion,
- Balanced budgets are the right way to run the economy, like balanced household budgets, and the only way to produce stable prices,
- The precedent of other countries, like Canada, show that harsh cuts, however painful, are the quickest and most effective way to generate strong growth thereafter.
These ideas have been insidiously and relentlessly imprinted on the nation’s consciousness over the last weeks and months to lay the foundations for today’s measures. Yet every one of these prescriptions is utterly wrong. This is why.
- The financial crash was caused by the recklessness of US banks on Wall Street, and equally of UK banks in the City, in profiteering on toxic derivatives which they did not understood and turned out to be near-worthless. The State bore no responsibility whatsoever for their greed and folly. By bailing out the banks the State proved itself, not the problem as Cameron pretended, but the solution.
- The budget deficit, at 10.3% of GDP, but coming down steadily – already £25bn less than 9 months ago. Britain’s national debt, at 62% of GDP, is well below that of Germany, France, and the US, and vastly below Britain’s debt at the end of the war when it reached 250% of GDP, from which it steadily decreased by economic expansion and without any spending cuts.
- The real cause of the economic downturn is the collapse of private investment in 2007-8, and public spending, so far from being excessive, was necessary to fill the gap left by the private sector.
- The idea that the private sector is crowded out by an over-large public sector is the opposite of the truth: around £150bn of private sector development is dependent on public spending. Osborne’s cuts today will weaken growth further and squeeze private investment even more.
- Balanced budgets are the primitive economics in the 1920s of Montague Norman, Governor of the Bank of England and of Herbert Hoover, US President. In both countries it led directly to the Great Depression. Capitalism is driven by cyclical forces which need tight regulation, not balanced budgets irrespective of the cyclical momentum.
- Canada is in no way a precedent for the current UK situation. Canada’s harsh measures 1994-7 were balanced by export growth due to US expansion, but there is no such option for Britain today. And Osborne has gone overboard on austerity – today’s cuts are as tough as the IMF imposed on Greece which is on the verge of bankruptcy, twice as tough as the Canadian measures, three times as tough as Sweden’s measures 1993-5, and much tougher even than in the IMF crisis in 1976.