There is no alternative!
The ConDems are wrong.
Immediate and deep cuts in public spending are not ‘unavoidable’. The UK is not the next Greece. At no point during the recession did the UK’s fiscal position bear serious comparison to the real and immediate crisis facing Greece. The markets were not and are not pressing for immediate and deep public spending cuts. The Government’s approach - 80% spending cuts/20% tax rises - is arbitrary and unfair.
Since the banking crisis led to a rising deficit, Cameron, Osborne, Clegg and their supporters have told us that Britain is broke and at risk of becoming ‘the next Greece’. They solemnly tell us that an imminent speculative attack by global financial markets will result in far deeper cuts than anything being proposed by UK politicians. They tell us that the emergency Budget was ‘unavoidable’ if such an attack is to be averted. They dust down Thatcher’s favourite phrase: there is no alternative.
The ConDems are wrong. Immediate and deep cuts in public spending are not ‘unavoidable’. The UK is not the next Greece. At no point during the recession did the UK’s fiscal position bear serious comparison to the real and immediate crisis facing Greece. The markets were not and are not pressing for immediate and deep public spending cuts. The Government’s approach - 80% spending cuts/20% tax rises - is arbitrary and unfair.
The ConDems choose to focus on the UK’s deficit – the difference between what the government receives in revenues (taxation) and what it spends – which is indeed high by international standards. However the ConDems deliberately avoid other comparisons; ones that show the UK public finances in a very different light:
• The UK’s national debt is not unprecedented by historical or international standards. Current UK debt is 68% of GDP compared to Greece at 115%, Japan at 217%, US at 83.2%, Germany at 73%, Belgium at 97%, France at 77%. The average for advanced economies is 77.3%;
• The structure of debt is as important as its size: the vast majority (70-80%) of UK debt is held within the country not by foreign investors. The maturity of UK debt (the length of time until the debt must be paid) is longer-term than other advanced economies: 13 years in the UK compared to an average of 6.5 years for other advanced nations;
• The cost of servicing debt is not high historically. Osborne tells us only the absolute or nominal cost of servicing the debt – and the numbers can appear frightening. He does not point out that servicing costs, as a proportion of GDP, are not high by historical or international standards. The IMF estimate that on current policies debt interest payments will rise from 1.6% of GDP in 2007 to 3.1% in 2014. This represents a significant rise of around £15bn a year. However it must be placed in context: the average for advanced G20 nations is projected to be 3.5% of GDP in 2014; 4.5% in the US; in the UK the net interest payment share of GDP was above 3% in the 75 years between 1916 and 1991.
• Financial markets continue to enthusiastically fund Government debt. Since the deficit rose rapidly on the back of falling revenues and higher social spending during the recession, the Government has not had any problems selling debt to investors.
If fear of large future government deficits was undermining market confidence in the UK then interest rates on government debt would be high and rising: a situation Greece continues to experience. But that is not our situation! Instead, unemployment is high and a massive amount of the country’s productive capacity is lying idle (estimated at 5% of GDP by the Bank of England). Given that expected deficits are not undermining confidence, there is a very strong case for increasing spending in order to create jobs, help the unemployed back into work and get the economy moving.
Don’t take our word for it!
A range of commentators have challenged the case for immediate and deep cuts to public spending while the economy remains depressed.
Martin Wolf, Chief Economics Commentator, FT, ‘Spare Britain the Policy Hair Shirt’
William Keegan, The Observer, ‘David Cameron’s cost-cutting echoes that of Thatcher’s first government – and it will be just as damaging’
Robert Skidlesky and Michael Kennedy, FT, ‘Future generations will curse us for cutting in a slump’