Yesterday’s papers were alight with jeremiah comments saying the economic strategy could not work and we need a Plan B. The headlines and quotes often said the Chancellor needed to slow the pace of the spending cuts, yet the truth kept popping out of the analysis. Both the Observer and Guardian allowed statements that so far public spending has risen and has contributed positively to the GPD outcome over the last year. They both acknowledged that the government is trying to cut the rate of increase in the debt, not seeking to cut the debt itself. Both saw that if the government continued to borrow too much markets could lose confidence and interest rates could be forced up damagingly.
The problem comes from the reluctance of economists to say what the figures say – so far the squeeze has been on the private sector, not the public. So far the biggest cause of the squeeze has been rising inflation thanks to the weak pound engineered by the Bank’s strategy,followed by tax rises on income and spending. Probably the single most important cause of slow growth is the weakness of the banks, or the insistence of the regulators that the banks put increasing cash and capital above financing the recovery.
All last week I wrote about how Plan A could be made to work. It will need more changes to get the private sector led recovery the strategy requires for success. The economists who criticise the lack of a Plan B need to understand Plan A. In a way it is their own plan. It rests on tax revenue increases, not on spending cuts, to deliver most of the reductions in the deficit. The last budget saw a substantial increase in borrowing and a relaxation of the targets for deficit reduction from the first Coalition budget, less than a year into the strategy. Why don’t the economists welcome that flexibility, and why isn’t their recommendation which the Chancellor adopted in March working as they say it should? Don’t they bother to read the Red Book which sets out very clearly extra spending and extra borrowing?
Whilst they are pondering that question, they might also like to answer this one. Why are the largest deficit countries like Greece, Ireland, Portugal and now the UK growing more slowly if at all than the lower deficit countries like Germany and China? Doesn’t international evidence show that fiscal stimuli can backfire if they are linked to over tough regulation of banks, broken banks, or to rising rates owing to a lack of confidence in the fiscal strategy?