George Osborne continues the sense of strategic confusion about Conservative fiscal policy with a column in the Financial Times today, in which he argues for – surprise surprise – early cuts to the deficit. Although the conclusions at the end are mild (‘a medium-term fiscal framework, with the first steps starting this year’), the rhetoric is uncompromising – a determination to emphasise the possible virtues of cuts, regardless of whether the conditions are right:
The general notion that delay is beneficial in the short term because it provokes more spending today – irrespective of future debt burdens – is also wrong, in theory and in practice. If the starting position is a large structural deficit, further fiscal “stimulus” can darken consumer and business confidence by creating fears about future debt burdens. These fears may be translated directly into higher borrowing costs today for government and the private economy.
You will have read with avid interest my post on non Keynesian effects, so already know that these things can happen. More committed fans will have read ‘A Balancing Act’ in which I support what Maggie et al (boo, hiss) did in the early 1980s, when they uncrowded the economy from government’s clammy control.
But all these qualifiers about what ‘can’ or ‘may’ happen are beside the point. What matters are the conditions on the ground. Knowing that it CAN work if we have 1976 conditions, or if we are like Ireland and Iceland and too small and open to enjoy much fiscal encouragement, is really beside the point.
There is also the most phenomenal slaughter of straw men. The position opposite Osborne’s is not to say ‘irrespective’ of debt burdens the deficit should rise. This Labour government is already presiding over the first fiscal tightening amongst any major OECD country. It is not proposing further stimulus, just a less rapid withdrawal than the Tories (see IFS Green Budget). Neither is the government arguing that “future job creation can come simply from the public sector payroll”. All parties by implication expect these rolls to shrink.
While I share Osborne’s suspicion that Brown would have allowed the deficit to take the strain regardless, collapsing demand and zero rates (and beyond?) made this policy right. A fluke, perhaps? But the Keynesian view was not: ‘this is always right’ – and in the next two years as growth returns – if growth returns – the conditions for fiscal support will disappear.
Between Brown and Osborne we have two economic and fiscal strategists who seem determined to make policy according to ideal archetypes from their glory days. For Osborne it is always 1980; for Brown, it is always 1996, and Labour investment versus Tory Cuts. Thank goodness we have two empirical pragmatists in Alistair Darling and Vince Cable to hold the sensible middle. Oh, and that merciless cutter Hopi Sen; see LibCon:
“I believe that a widening of the short run deficit at the moment would be recieved negatively by both the markets and the media, and end up being an expensive and politically disastrous mistake, with little economic benefit”
UPDATE: I forgot another straw man. Or, in fact, outright misinformation. The column writes “Blaming our predicament on financial markets ignores the awkward truth that governments have enabled if not enthusiastically promoted recklessness, through chronic deficits and lax regulation”.
How does that work? I thought the overleverage came from rates being too low? But I thought that deficits made rates too high? And I thought our deficits were about 2-3% before, and have since become chronic? If the government had run no deficit in 2005, it might have seen LR rates 1% lower, and even more housing and financial speculation. Or are the deficits he means trade deficits that underly imbalances? Mr Osborne, please work out where you stand on this one.