Tory right, obsessed with cuts, still deaf to the lessons of the thirties

George Irvin is a retired professor of economics and is currently (honorary)
Professorial Research Fellow in Development Studies at the University of London, SOAS; he is author of “Super Rich: the rise of inequality in Britain and the US”

The Centre for Policy Studies (the original Thatcherite think-tank) has issued a short pamphlet entitled “Pain Aversion: addictive, but no basis for medium-term economic policy”, written by the venture capitalist, Jon Moulton.

The main theme of the pamphlet is that Britain’s debt is still growing and that in consequence the coalition government must cut public spending even more harshly; ie, the state must be shrunk more vigorously and more private firms must be allowed to fail (ie, unemployment must rise). Right-wing Tories are fighting to prevent a u-turn by the coalition.

There are at least four points about which this pamphlet is either misleading or wrong:

• The nature of Britain’s debt and how to reduce it;

• That the recession has caused remarkably little pain;

• That Britain’s large State is stifling growth; and

• That unless we pay off today’s debt, the next generation will bear the burden.

Moulton, who has no formal economics training, repeats the old chestnut that while net UK government debt (excluding interventions) is 59% of GDP, if one adds the purchase of bank assets, the ratio rises to 155%. Indeed, he argues, adding total PFI commitments and public pensions, the total is more like 250%.

In his words:

“Only a couple of Western nations – Ireland and Iceland – managed to increase their debt relative to GDP faster than the UK in the last three years.”

These assertions about UK debt are misleading for two reasons. First, the ONS has made it clear that the 59% figure (excluding interventions) is preferred because it is:“used by HM Treasury … [and for forecasting by] the Office for Budget Responsibility”. Secondly, quite unlike Ireland and Iceland, most UK borrowing is from the UK non-bank public. When fund managers or even ordinary citizens hold UK government bonds, they are an asset; in Britain at least, most UK public debt is offset by UK private assets.

The second argument, “no pain, no gain”, is almost entirely rhetorical. Yes, libertarians may believe in Schumpeterian “creative destruction”, but that does not make it any more palatable. If UK corporate failure and unemployment are not higher than during the 1991 recession, it is because Labour quickly introduced an economic stimulus package. Had the economy been left to its own devices and the banking sector allowed to collapse, we would indeed have gone into a spiral of debt-deflation with many more firms collapsing. Youth unemployment, currently 20%, would have been double that rate

Is Britain’s large state stifling growth? Again, Moulton asserts this on the basis of an implicit “crowding out” type argument; e.g., large government = high interest rates = less private investment. But there is no evidence for financial crowding out; indeed, one would have to show that “full crowding out” is taking place for the argument to hold. Crucially, many EU economies with a larger state than ours (e.g., Germany, France, the Nordic countries) are growing more rapidly.

Intellectually, Moulton’s right-wing arguments are threadbare. The difficulty is that because George Osborne has no Plan B, he will be tempted to listen to this nonsense and redouble his efforts at budget cutting. Cutting back the state will not stimulate private growth. Fiercer cuts will lower growth, raise unemployment and widen the deficit. The next generation will inherit a Britain far poorer than it might have been.

The Tory right, obsessed with shrinking the state, appears entirely deaf to the lessons of the US in 1937, or of Greece and Ireland today.