Editorial: The Old Rock 01.04.2011
Alistair Carmichael and his government continue to peddle the myth that when they came to power last May they had no choice other than rapidly to impose deep cuts in public spending following the financial crisis. This “narrative”, as the political classes like to style it, is now firmly established in our political discourse – but it needs to be resisted.
That a political choice was made by the coalition to take this route rather than that of, for example, President Obama, who despite pressure from the Republicans has broadly let economic recovery take precedence over cuts, or that suggested by the Nobel Prize-winning economist Paul Krugman of actually increasing public spending, ought to be acknowledged. Such routes are not cost-free, of course, as the United States with its gargantuan budget deficit of $470 billion testifies, but then neither is the UK government’s: the loss of jobs, the abandonment of successful projects and initiatives and the damage to morale in the public sector is economically and socially debilitating, as the drip-feed of negative economic indices and Saturday’s huge march in London show.
On cuts, the Liberal Democrat manifesto for last year’s general election noted: “We must ensure the timing is right. If spending is cut too soon, it would undermine the much-needed recovery and cost jobs.” Precisely.
Part of the government’s contention is that had it not introduced its draconian cuts the cost of servicing its debt would have soared to levels seen at the time in Greece and later Ireland and Portugal. Yet interest rates on 10-year government bonds in this country are currently marginally above those of the so-far cuts free United States (3.54 per cent to 3.34 per cent), which at least casts doubt on this claim. And despite their own cuts Greece and Ireland continue to face punitive rates: 12.37 per cent and 8.69 per cent respectively (all bond figures are from The Economist). The truth is that the government panicked last summer.
While a less damaging, less election-oriented strategy (it is clear the government wishes to get the dirty stuff out of the way before the next election in the hope that it might be re-elected) would have resulted in shallower cuts over a more prolonged period, a more radical government would also have tackled the tax question more robustly. Britain is under-taxed relative to its public spending aspirations.
But instead of taking on, among other things, the banking industry, which has escaped meaningful sanctions for its role in the financial near-collapse, this government decided to raise VAT. While the Dutch have voted to impose a 100 per cent retrospective tax on all bonuses paid to executives in bailed out financial institutions, our leaders seem content to let Stephen Hester, chief executive of the largely state-owned RBS, walk away with £7.7 million. Sums it up really.