Osborne’s 8 July budget will be forced through in the teeth of all economic experience. The history of the last 70 years demonstrates one conclusion irrefutably: austerity is the wrong way to cut deficits. After the second world war had dramatically drained Britain’s wealth and left the country with colossal debts amounting to 260% of GDP, these huge deficits were easily tamed by fast economic growth in the post-war years.
President Clinton achieved a similar turnaround in the US after he inherited an enormous deficit in 1992 and ended his 8-year presidency with none, largely due to rapid economic growth. Again, the Swedish high budget deficit was successfully brought down during 1994-8 by a policy of fairly fast economic growth. Even in the US in recent years, despite the political deadlock and a largely non-functional Congress, the US has achieved a far bigger and faster recovery from recession than Europe, again as a result of the priority given to growth by Obama.
What is striking about these previous periods of large deficits is that debt was not a significant political issue. The public were not scared by the size of the public debt. For every year between the mid-1940s and the mid-1960s the debt was far, far higher than at any time since 2008, during which time it hasn’t peaked beyond 80% of GDP. Yet there was no panic, indeed it was a time of huge confidence as the foundations of the Welfare State were being laid. Had the British public been as acutely frightened by their leaders about the debt ration in the post-war period as they are being panicked now by Osborne, the welfare state, the inspiration not only of Europe but of the whole world from China and Singapore to Brazil and Mexico, would never have been born.
Equally remarkably, when Harold Macmillan as new prime minister in July 1957 told the British people that they had “never had it so good”, the size of the government debt at that time was 120% of GDP, far far higher than the debt ratio of about 70% in 2010 when Gordon Brown was accused of mortgaging Britain’s future by profligacy.
So why the vastly different reaction to public debt in those previous times compared with today? The answer is that Osborne has been skillful at framing an (untrue) narrative to suit his political purposes while Labour has utterly failed to offer a (true) counter-narrative to Osborne’s fetish with austerity. Osborne has successfully manipulated the issue of austerity to provide the excuse to achieve his real aim of shrinking the State, squeezing the public sector and privatising almost all public assets.
Labour on the other hand has been all over the place between the Blaitite rump who largely support Osborne, a shadow chancellor who never stamped his mark on a credible alternative policy, and a Left whose calls for growth were ostentatiously ignored. Labour now desperately needs one central theme: Austerity won’t cut the deficit, but growth will.