It is extraordinary that Britain is being held hostage in an enormous laboratory experiment, the hypothesis of which is laughable. Osborne claims eliminating the deficit of £110bn within 5 years was not just necessary, but the best way to restore growth quickly. The argument is that if the budget deficit were reduced substantially and rapidly, consumers would buy more because they had been relieved of funding, through taxes, a larger budget deficit, and businessmen would be more likely to invest because interest rates would be lower with a smaller deficit. Does anyone seriously believe this? If not, why is nobody challenging it like the little boy who exclaimed that the king had no clothes?
Even if you were prepared to give these far-fetched claims the benefit of the doubt (which I don’t believe any actual consumer or businessman would ever entertain), what does the historical record say? Interestingly, there are 3 British precedents for this scenario, and they are well worth studying.
The first is the Geddes Axe of 1921-2 when a committee of leading businessmen, chaired by Geddes, demanded that the Lloyd George government (an earlier Tory-Liberal coalition as it happens) cut public spending by £100m (roughly equivalent to £100bn at today’s values) in order to restore growth when output was falling. The result was ultra-anaemic growth for 8 years peppered by serious civic unrest culminating in the General Strike in 1926.
The second precedent is the similar action of the Labour Chancellor, Philip Snowden, responding to growing UK unemployment after the Wall Street crash of 1929, in appointing yet another committee of businessmen (chaired by May) to deal with rising public expenditure and once again restore economic growth. May demanded spending cuts of £96m, but a month after the cuts were implemented in September 1931 a mutiny of naval ratings at Invergordon faced with pay cuts forced the UK off the gold standard. Five years of solid growth then did follow, but this was caused by abandoning the pre-war parity with the dollar which both allowed a fall in interest rates to 2% plus a 30% devaluation of sterling and a consequent export surge. Had this (entirely unplanned and unexpected) monetary easing not occurred, the cuts would certainly have instigated even bigger hunger marches in the 1930s.
The third precedent is the Howe budget of 1981 when he took £4bn or 2% out of the economy when unemployment was already rising. Again however interest rates were cut and restictions on bank lending lifted. The economy emerged from recession, but again (more by luck than judgement) the monetary loosening had smothered the deflationary impact of the large spending cuts.
This time round however in 2010-11 no significant further monetary loosening is possible now that Bank Rate is at 0.5% and £200bn of new money has been printed (quantitative easing) with little or no effect on a sluggish economy. So when is the Labour Party going to tell Osborne that his whole programme of cuts is based on an outlandish intellectual theory which has been repeatedly exploded in the historical record and is manifestly doomed to failure?