Budget won’t cause a new recession

Allister Heath
WE all know what Mark Twain thought of the extraordinary ability of statistics to make even the weakest of arguments sound persuasive. In the main, this week’s emergency Budget was remarkably honest, especially after years of debased Red Books from the previous Labour government.

But there has been some confusion about the extent of the (much-needed) spending cuts being announced; some readers have even written in questioning whether City A.M. and others are right to describe George Osborne’s plans as cuts. We are; and this is why. Overall spending will fall substantially year after year after adjusting for inflation, will drop significantly as a share of GDP and will be hacked back especially severely in real terms in many departments (it may have to drop by up to 33 per cent in some, the Institute for Fiscal Studies said yesterday). It will also be substantially lower than originally planned by Labour – and lower than Alistair Darling proposed at his Budget earlier this year.

However, in cash terms – in other words, before adjusting for inflation – spending will continue to go up every year. It is just that the money won’t buy as much and more of it will be spent on interest. Take 2009-10, the last Labour year: spending then was £669bn, rising to £697bn in the current financial year, £700bn in 2012-13, £711bn in 2013-14, £722bn in 2014-15 and £737bn in 2015-16. By then, the total cash increase will be worth £68bn a year, or 10 per cent above the last full Labour financial year. However, this will be worth less in real terms and so it is fair to describe this a real terms cut.

The biggest problem for the Tories is that departmental spending (which excludes debt interest and benefits) will be cut – and because foreign aid and the NHS are being entirely protected, the spending reductions will be severe. If one assumes that defence and education will drop 10 per cent in real terms, then other departments will have to suffer 33-34 per cent cuts in real terms. The only way to abate this would be to make extra savings from welfare or to renegotiate the settlement with Scotland and Wales, which gobble up disproportionate amounts of taxpayers’ money.

One argument that many have made is that we are all worse off as a result of this Budget’s spending cuts. In the aggregate, this is nonsense: government debt is not some sort of a free lunch, a way of not paying for spending. Public spending must be financed in one of three ways: by making the public pay straight away via taxes, by borrowing from the markets and then – a few years down the line – by forcing the public to pay the debt back; or by printing money and inflating the debt away. The fact that we are cutting back on option two and promoting option one is a good thing. Nobody wants to lend forever to imprudent countries; and it cannot be right to send today’s children and babies the bill for the cosseted lifestyle of their parents. Racking up massive liabilities goes against any notion of intergenerational equity.

Now for one prediction: consumer spending will be squeezed by the regrettable (and avoidable) hike in Vat and from the (necessary) cuts in spending. But reduced debt-financed spending will go hand in hand with growth in private investment and exports, partly thanks to strong global demand, thus cushioning most of the impact. The years ahead will be very tough – but there will be no double dip recession made in Downing Street.