Growth or deficit: “Economics is the method. The object is to change the soul”

There’s a good piece in The Guardian from Julian Glover who says, yes, the Coalition does want cuts for ideological reasons, but then what of it?

Yet ministers, by and large, hesitate before admitting this. Liberal Democrats worry about scaring their voters. Conservatives aren’t sure the country will understand their big idea. It’s easier to take refuge in the alternative truth that cuts are happening because they are needed. Even Ed Miliband issued a press release last week agreeing.

From this follows the lazy line that all this government is doing is responding robotically to its circumstances. But blaming the last government for the horror already sounds weak.

The truth is that English councils right down to Parish level have already started having their budgets capped last year, under Gordon Brown. Even in deep blue Tory parts of the country where ‘living within your means’ had long been part of the culture.

So Gordon Brown was already steering the UK into austerity Britain. Just not as fast as George Osborne’s Comprehensive Spending Review (CSR) is being trailed. And that heavy trailing has had the useful (from a government point of view) of invoking ‘shadow moves’ towards cuts in councils and various departments far beyond Whitehall.

The rather comic set piece between Sinn Fein and, well, the DUP (if only the latter would have taken the bait) last week over whether you should even attempt to identify cuts in advance of next month’s Comprehensive Spending Review was something of a sideshow to the main event.

Yet last week Larry Elliott, the widely respected economics editor of the Guardian, warned that those who calculate that the global economy is now safely beyond a ‘double dip’ may be wide of the mark:

The OECD said it was too early to say whether recent evidence of the loss of momentum in the recovery was temporary or permanent, but said the G7 group of industrialised nations – the US, Britain, Japan, Germany, France, Italy and Canada – were now likely to grow by 1.5% at an annual rate during the second half of 2010 compared with the 1.75% predicted in May.

In its latest forecast, the thinktank said it expected a gradual deceleration in growth from the peak in the second quarter of 2010. The OECD has pencilled in G7 expansion at an annualised 1.4% in the third quarter and 1% in the fourth, down from 3.2% in the first quarter and 2.5% in the second.

The US is expected to grow at an annualised rate of 2% in the third quarter, slowing to 1.2% in the fourth, after 1.6% in the second quarter and 3.7% in the first three months of the year. In Japan, GDP growth is forecast at 0.7% in the fourth quarter after 0.6% in the third. The UK is set to grow at an annualised rate of 2.7% in the third quarter, slowing to 1.5% in the final three months of the year.

Not everywhere is the same. Politics.ie had a decent thread last week based on this nice infographic on Europe’s economic climate in the FT, which shows the various differentials in economic performance. The Republic and Greece are bumping along the bottom whereas in places like Germany everything seems to be fine, thank you very much.

Except that economic growth in Germany appears very much to be driven in the traditional German way: ie by exporting goods. The Domestic market appears to be trailing by some considerable way. It leaves them vulnerable to the economic crash the now out of favour stimulus was supposed to avert.

Elliott’s not the only one worried about the macro climate. Friday week ago, Martin Wolf noted that for all the new government’s short term emphasis on righting the UK’s fiscal boat, ‘the market is screaming its lack of concern about UK fiscal credibility about UK fiscal credibility. UK government 10 year bonds are yielding 2.9 per cent and the real interest rate is below 1 per cent.”

He notes the current influence on conservative thinking of a paper by two Harvard based academics, Alberto Alesina and Silvia Ardagna written and published last year. In fact, it seems to point towards the fact that private habits (ie, hitting the credit card or investing in the property bubble rather than personal savings) has as much to do with the current crisis as any fiscal irresponsibility in government, whether real or imagined.

Wolf continues:

The Office for Budget Responsibility forecasts seem remarkably optimistic on the ability of net exports and business investment to offset fiscal contraction. But I would also stress the sheer uncertainty, as show in its probablity ‘fan charts’.

How would the government respond if its plans generated a recession, as is possible and, in my view, probable? I have no idea. It would presumably rely on the Bank of England. There are reasons to doubt that the latter would be very effective.

Wolf in turn points to Ed Balls’ new dictum that ‘a parliamentary term is not the same as an economic one’.

In fact, despite his air brushing of the awkward facts of the recent past Balls makes some useful points in a recent speech at Bloomberg (designed no doubt to get the maximum hearing in the US where Obama is struggling to explain the sense of Brown’s big legacy plan for the US: aka, the  Stimulus):

Above all, stability requires a credible medium term path for fiscal sustainability and stable growth. What undermines confidence is uncertainty over whether a sudden fiscal adjustment is deliverable and over the impact it will have on consumer and investor confidence.

Time and time again in recent years, we have seen the markets lose confidence – usually in emerging market economies – because they see fiscal adjustment plans which look tough but lack credibility and end up being self-defeating.

A vicious circle begins of slower growth, investor flight, further reduced projections for growth, a worsening fiscal position, and further loss of market confidence.

And the kicker:

…outside the Eurozone and with long-term real interest rates at record lows for both 10 year and 30 year bonds – Britain faces no difficulty servicing its debts as recent debt auctions have demonstrated – and the term structure of our debt is long thanks to the brilliant work of the Debt Management Agency.

If only the same could be said for Ireland, now the in grip of a series of ECB directives and the accountants of the Department of Finance.  Deflation is the only economic and political choice, so we are told.

Back to Balls again:

In a recent article in the Financial Times, the historian Niall Ferguson wrote:

“People are nervous of world war-sized deficits when there isn’t a war to justify them.”

But this is precisely the case I made to Gordon Brown and Alistair Darling last year – we have just experienced the biggest global financial crisis in a century, an event as momentous in historical and financial terms as war, famine or a natural disaster.

Our economies were saved from catastrophe only by government intervention to nationalise banks and to absorb huge financial liabilities from the private financial sector. To attempt to repair the damage of such an event and return the national debt to its previous level in just a few years is not only dangerously incredible in the eyes of financial markets but places an intolerable burden on current users of public services.

Just think if Clement Attlee’s government at the end of the Second World War had decided that the first priority was to reduce the debts built up during the war – there would have been no money to fund the creation of the NHS, no money to rebuild the railways and housing destroyed in the Blitz, no money to fund the expansion of the welfare state.

At this point it is worth doubling back to Matty Yglesias’s clever ‘self-fisking’ of Ferguson here… And to take Professor Niall Ferguson utterly unfairly out of his 2003 context:

…those who panicked about the debt under President Reagan failed to see how manageable it was. It’s even more manageable today.

In short, Glover (and the Cameron/Clegg coalition leadership) are right that there is a cultural problem alongside the big political/economic problem of debt. But it remains to be seen whether they have both the measure of the problem, or the mandate to follow through with their preferred solution.

Penultimate word to Glover again:

You can either pretend, as Labour does, that the government should go on as before, and hope no one notices the illogicality of promising to spend far less on much more; or you can recognise that the crisis of over-spending is really a crisis of over-government and do something about it: progressive austerity, as George Osborne once defined it.

This is no Hayekian nightmare. Indeed, the further the government can get from measuring everything in terms of pure economics the better. That isn’t only because the numbers are going to be grim. It is because the government is liberal, not Thatcherite, in its thinking.

The point of reducing spending is to change the state, not just spend less. Success can’t be measured in terms of the ratio of government expenditure to GDP, as someone on the Tory right – say, John Redwood – would like.

This point was there in Nick Clegg’s description on the Today programme of state dependency in the north-east as not only unaffordable but unhealthy. It is there in a book published this week by the Tory MP and Cameron ally Nick Boles. He describes “genuine horror at the overweening power of central government and its treatment of citizens either as supplicants … or lab rats in some vast social experiment, designed to improve mankind”.

Which Way’s Up?, Boles asks in the title of his book: the point is the gravitational pull of politics has changed. He argues for the decentralisation of money, power and policy far beyond anything the government currently has plans for, and it isn’t fair to say he is only calling for this because of cuts. Cameron’s friends were decentralisers long before the deficit became an issue.

Fine sentiments. But it remains to be seen whether the culturally driven urgency to foreshorten the repayment of national debt does what it says on the tin.

It is all much more reminiscent of an earlier age than Mr Glover might have us think. It was Margaret Thatcher after all who once said, “Economics is the method. The object is to change the soul.”

Whilst Mr Balls’ secularism in this regard may run the danger of missing the importance of reducing the UK’s long term personal debt problem, it might also pay the new UK government not to repeat Mrs T’s ultimate problem and confuse the two things…

Mick is founding editor of Slugger. He has written papers on the impacts of the Internet on politics and the wider media and is a regular guest and speaking events across Ireland, the UK and Europe. Twitter: @MickFealty