It’s worrying that Ed Miliband in launching Labour’s local election campaign seemed so defensive and uncertain about his economic case, when it is actually very powerful. Economic growth by itself, on the Government’s own forecasts, will halve this year’s Budget deficit within 5 years without a single public expenditure cut being made. Higher taxes exclusively concentrated laser-like on the highest-paid 1%, and particularly on the top 0.1% who have made gargantuan gains in the last 15 years (and who were the ones largely implicated in the financial crash), would raise most of the rest – certainly enough to keep spending cuts to a very small minimum. That’s a very strong case that has still not yet been made by the Leadership. But even that does not include the killer app.
The clincher is the ideological base underpinning on the one side Osborne and on the other Labour. Osborne’s case goes like this: the private sector creates the wealth and the government squanders it, so the more the government can be made to tax and spend less, the more the economy will thrive. Government borrowing, he says, is simply deferred taxation because it all eventually has to be paid for and far-sighted companies and people, knowing their taxes will have to rise in future, spend less in order to save for the expected future taxes. That then causes a recession. So, under this theory, if the Budget deficit is decimated fast, the more quickly will the private sector start to spend and invest again because the need for higher taxes has been removed.
Believe it or not, that’s the rationale behind the Osborne policy. Does it work? It has been tried three times in the last century in the UK. It was tried in 1921 when the Geddes committee of leading businessmen proposed a similar massive cut in public expenditure (the ‘Geddes axe’) and it led to 8 years of anaemic growth and the General Strike in 1926. It was tried again in 1931 by the May committee of leading businessmen and it led to a mutiny in the armed forces and the hunger marches of the 1930s. Then to a lesser degree it was tried a third time by Geoffrey Howe in his deflationary Budget in 1981 and growth gradually took off. But even monetarist economists acknowledge that that had much less to do with Osborne-style ‘expansionary fiscal contraction’ (i.e. contract public spending and the economy expands) than with big cuts in interest rates, loosened restrictions on bank lending and and a revival of the international economy, all of which coincided but none of which is available today.
The theory, which is fancifully counter-intuitive, has never worked because in a deep recession it’s public spending that alone keeps the economy just about buoyant. Remove it, and the collapse will be far worse. The Osbornites have got it the wrong way round: it’s not the deficit that cause private spending to fall, it’s the fall in private spending brought about by the financial crash that cause the deficit to rise.
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