They don’t call it the dismal science for nothing. You could forgive politicians of all parties for despairing of economics. Take the great deficit row. On the one hand we have all the economic analysts in the City, saying that Britain’s budget deficit is much too high, the largest peacetime deficit in history, and has to be cut. If you don’t cut the deficit, then the cost of debt interest will shoot up above £70bn and Britain will have a Greek tragedy. This is why the chancellor, George Osborne, is planning an epic austerity programme in next week’s emergency budget.
But on the other hand we have another group of economists, like Nobel laureates Joseph Stiglitz and Paul Krugman, who say no! no! no! – cutting the deficit is the last thing we should do. At least not now, while all the EU economies are doing the same thing. The combined austerity programmes will plunge us all back into recession as demand falls and trade grinds to a halt. Government debt will actually rise because of the increased cost of mass unemployment and the loss of tax revenue. The latest rise in unemployment yesterday to 2.5 milion suggests that this is a real problem. We were already having a jobless recovery – swingeing cuts in public spending could make it a jobless slump. Labour’s interim leader, Harriet Harman, tore into the “Tory cuts” at prime minister’s question time yesterday accusing David Cameron of “talking down the economy” for ideological ends.
So there you have it: the deficit is going to go up if we cut public spending and it’s going to go up if we don’t cut spending. Brilliant! Britain is on the fast track to default, and in a hand cart to stagflation, whatever we do. Might as well grab a gun and a bag of gold and head for the hills. Fortunately everyone is agreed on one thing: economic growth is the only way ultimately to bridge the deficit – just as you have to get a job earning good pay in order to pay off a mortgage. Everyone, Labour and Tory, also agrees that the deficit has to come down. The question is basically one of when and how. The neo-Keynsians say that you need to keep spending high for the time being to replace the demand destroyed by the downturn/ The fiscal conservatives say that we are already nearing the limits of borrowing and that Britain’s debt crisis will spiral out of control if we don’t convince the bond markets that the government is serious about balancing the books. After all, our deficit is larger than Greece’s right now, and the about only reason financiers and firms are still buying our government debt is that Britain has a relatively good record of paying it back.
It’s really a question of just how much debt can we take. Britain’s national debt is relatively small right now at 60% of GDP and is scheduled to rise to something like 90% . After the Second World War, America had a budget deficit of 120%. Which was a good thing according to the Guardian’s economics editor Larry Elliott. “Far from being burdened with unpayable debt” he wrote this week, the baby boomers in the late 40’s and early 50’s were the most blessed generation in history”. Well, some might disagree with the beatification, but what is really wrong with this analysis is that, er, we aren’t at war, and hopefully won’t have to be.
It’s true that rearmament ended the Great Depression and America boomed after the war. But this was largely because the dollar became the world’s reserve currency, and America, on the back of that, became the world’s greatest industrial and military power. It could dictate the terms of trade, and still does. War isn’t a get out of jail free card mainly because it is not possible to replicate the wartime conditions in peace. The government can’t go around freezing bank accounts, seizing property and dictating to industry. And Britain after the war was a very sorry place indeed, afflicted by rationing, deflation and manufacturing decline. I don’t believe that people could go back to that.
The peacetime debt record is held by Japan, which is scheduled, according to the IMF, to borrow 250% of GDP by 2015. But this colossal spend hasn’t been much of a stimulus – Japan’s economy been stagnant since the property crash nearly twenty years ago. Japan is able to run massive deficits because the Japanese people are fanatical savers. The British public doesn’t save a penny, in fact we are so addicted to debt that we owe, in personal debts, more than our entire annual national income. Any way you look at it, Britain simply cannot risk going much further into debt. We are heading for a trillion pound national debt; a trillion pound public sector pension liability piled on top of a trillion pound bank rescue and personal debts of one and a half trillion. There’s no way of laying this off, pretending it’s not there, wishing it away. Nor is default, or declaring national bankruptcy, an easy way out because that just raises further the cost of borrowing.
I’ve thought a great deal about this issue in the last couple of years, and I’m afraid I have to part company with the neo-Keynsians. Actually, Keynes didn’t support unlimited public spending and argued for balanced budgets in the 1930s. The most important political reason for cutting the debt, Keynes argued is that it will ultimately be paid, not by the rich, but by the working class. Public spending is unique in that it is paid entirely out of the taxes of ordinary working families or through inflation.
These are scary times. As European countries like Greece and Spain topple under the weight of their own debt, there’s a very serious risk of a wave of sovereign defaults across the euro zone. These are countries only recently emerged from dictatorship where democracy has yet to be tested by serious economic hardship. If the politicians here and abroad get it wrong, spending too much, printing too much, devaluing too far, we could end up like Weimar Germany. And what’s worse, Germany could end up like Weimar Germany too.