The Greek cuts should be a warning to us. One of the reasons they are so strongly contested, is that they come with a sharp decline in living standards attached. One of the reasons they have to be so large is the failure of the Greek and the wider EU economies to grow at a decent pace, despite the chance to recover from the recent recession.
It was worrying last night to see so much violence on the streets of Athens, to see senseless burning of cars and buildings. The Greeks need to create more wealth, not destroy it. It is no good going on strike against the money lenders, when you need to borrow so much money. The murder of three young bankers was alarming.
If you need to slim the public sector, there need to be job opportunities, the hope of a better life, in an expanding private sector. If you decide to make too much of the adjustment by tax increases rather than by spending reductions, you may cut private sector opportunity at the same time as depressing public sector pay and output, in the pursuit of equal misery.
One of the reasons so many UK people are telling pollsters they may vote for a party of the “progressive consensus” – parties in favour of high public spending and borrowing despite the financal backdrop – is they do not wish to experience any more pain and reckon if you refuse to cut spending all will be well. If only.
The Greek example shows us what can happen if you ignore the need to keep borrowing under control. You reach the point where no-one will lend to you on realistic terms. You literally cannot pay all the public sector bills, until you submit to an international plan to slash spending in return for a special international loan. There is no point going on strike against the IMF – you either borrow from them on terms you do not like, or you go bankrupt. It’s too late by then to seek pleasant options.
The UK has avoided this so far because it is outside the Euro and has more options. The UK government has chosen to cut the living standards of all of us by devaluing the pound, cutting by one quarter what we can afford to buy from abroad. It’s a crude device for getting things into balance, but has the advantage that people get poorer gradually without being able to blame anyone in particular. Indeed, people are most likely to blame the oil companies, as one of the most visible impacts is the rising price of petrol. It does mean the balance of payments starts to right itself as people cut expensive imports out of family budgets, seek UK substitutes or go without.
The UK government has prevented fears about its intentions making it difficult for the government to borrow by printing £200 billion to lend to itself. Despite this, the UK credit rating has fallen below Germany’s in the market.
We have to assume that most politicians think they can do no more of the same, that they must not print any more and they must at some point seek a stable pound berore the decline in living standards is blamed to them. So from here we will have more in common with the Greek situation.
If people are to be persuaded that we need to do more for less in the core public services, and less for less elsewhere in the public sector, it is important that politicians expalin why we can’t go on like this. It is even more important that they help create the conditions for strong economic growth in the private sector, so the economy can take the strain of adjustment, and so there are other answers for people who would like a state job or state benefits. One of the dangers for Greece, which is intensifying the political backlash, is the danger that the Greek private sector will be in no condition to respond positively as the public sector is cut. High taxes, the inflexibility of Euro money policy, and the bureraucratic impediments in the way of starting and expanding businesses are all against it.
If the UK is to succeed where Greece is failing it needs to use its advantages of its own currency and money policy to ensure more rapid private sector led growth. There needs to be hope. Hope does not come from high taxes and heavy regulations on the wealth creating sector at a time of compulsory slimming of the public sector. “The progressive consensus” who got us into this fine mess are right about this one thing – you can get into a vicious cycle of decline if you don’t stimulate the private sector when you cut the public. They are wrong that you can avoid cutting the public sector when you are borrowing so much – you need a stronger and bigger private sector to pay the bills.
Ps I don’t suppose all those pro Euro establishment figures will say thank you to the few of us in Parliament and in the commentariat who campaigned against joining it when the fashionable consensus thought it would be a great idea? Thank heavens for the commonsense of the British people which enabled us to persuade both major parties to put a referendum lock on the door of the pound, which worked.
Promoted by Christine Hill on behalf of John Redwood, both of 30 Rose Street Wokingham RG40 1XU