Economic Reality - Beggars Can't be Choosers - 27th February 2011

So many of my recent emails, whilst accepting the need for cuts in public expenditure, reject the case for a particular cut, and furthermore a few go on to complain about the pace and depth of the cuts.  This is the ‘code’ that has also been adopted the Government’s opponents. There is such overwhelming public acceptance of the need for cutting public expenditure, that there is little appetite amongst politicians to hold out against this tide of opinion.  The Opposition argument has therefore, concentrated on what they consider to the excessive speed and depth of the cuts, rather than challenging the case for cuts in principle. This was essentially the difference between the parties that was tested at the general election last year.  Gordon Brown really always wanted to fight the election on the platform of ‘Labour Investment versus Tory cuts’, however, the  majority of his cabinet -and Alastair Darling in particular- ensured that the Labour Party also went into the election committed to billions of pounds of spending cuts. The only differences were that the Conservatives said the cuts must start immediately whilst Labour wanted to put them off for another year, in addition, Labour planned to halve the deficit in 5 years where the Conservatives wanted to eliminate it entirely.

The national debt is now approaching £2 trillion. The interest on this debt is already £120 million every day: more than we spend on Education or Defence. Worse still, we are continuing to add more to the national debt:  the annual budget deficit –that is the excess of spending over tax revenue- is £148 Billion this year,   this is the amount of additional borrowing we will have to do this year to get by. We have to start addressing our problems by eliminating this annual deficit.

There is a perfectly respectable argument to be had about the speed at which to eliminate the deficit. Some economists argue that if you cut spending too quickly and too harshly you will slow economic recovery or even send the economy back into recession. I taught economic theory for 7 years and I do think it is an argument best confined to the classroom because political reality is so very different: “beggars can’t be choosers”.  Such is our reliance on international financial markets in order to continue to fund our deficit, we cannot afford to undermine their confidence in our determination to eliminate the deficit.  Any sign of weakening in our resolve would land us in the same boat as Ireland: we would be queuing up for an IMF bail-out at punitive interest rates and our misery would be multiplied.

I am not convinced that there is a persuasive case for a slower rate of deficit reduction and a gentler regime of expenditure cuts, but even if I accepted that there was, it would not be available to us. If we were to change our policy then the markets would alter the terms on which they are prepared to lend.  Higher interest rates would have much more painful consequences.  I am afraid that there is no alternative but to take the medicine as prescribed.