Politics:: articles from 2015 General Election Campaign
Deficit reduction: between a rock and a hard place
In recent discussions of deficit reduction my ear was caught by a survey or economists, organised by the Centre for Macroeconomics and the a press release from the National Institute for Economics and Social Research, both suggesting that austerity had not helped growth, and the Office for Budget Responsibility being quoted as saying that cuts reduced growth by one percentage point in each of the first two years of the coalition and by five percentage points over its lifetime.
The subtlety lies in a quote from Charlie Bean, former Deputy Governor of the Bank of England, that the main purpose of the austerity programme was to stabilise the banking system.
The banking system is vital to any country. Soon after Syriza was elected in Greece and announced an end to austerity I heard a rumour that some Greek government bonds had hit 15% interest: as government bonds are usually the at the bottom end of the range of interest rates in an economy that would point to scarily high borrowing costs for everyone. Banking is a major part of the British economy, which makes us even more vulnerable to the effects of an excessive deficit. That means it clearly makes sense to balance the budget.
But economists suggesting that the austerity programme has harmed growth point out the other side of this. Publicly the Liberal Democrat policy on the deficit sounds like a compromise between brutal cuts from the Tories and reckless borrowing from Labour. Serious cuts harm grown. Too much borrowing strains the banking system. Between these two is a fine balance: in many ways the best way to reduce the deficit is for the economy to grow so that tax revenues rise and some people move from being on benefits to being in work. Cutting too deeply risks making the deficit worse and creates human misery.
There are also places where spending public money in the short term pays for itself. Ill illustrate this with two examples from North West Leicestershire, where I am the Parliamentary Candidate. I am pushing for the railway line from Leicester to Burton-on-Trent to be re-opened, both for regeneration and for spreading the benefits of HS2. The County Council wants to close the Snibston Museum in Coalville, and I am keen instead for it to receive more investment, making it also an engine for regeneration. Both of these need public money. If either is left to the private sector, their priority will be to make a profit. If they instead are funded by the state they get paid for by the regeneration they create, which ultimately ends up with people needing less in benefits and able to pay more in tax. It is not borrowing with no hope of repayment, or choking off growth by cutting, but allows judicious spending to pay dividends, recognised in community and financial terms.
The Liberal Democrat balanced position on the budget deficit is more than a compromise between Labour and Conservatives: its a wise path to sustained recovery which steers problems of excessive austerity and excessive spending.