Take the size of our cuts: George Osborne’s planned fiscal consolidation over the next four years, while steep, will be smaller than those pushed through by many other economies in recent years. It will also be spread over more years than some other packages, which were often speedier and hence more brutal. The UK will be cutting spending by 7.5 percentage points of GDP, against 14 points starting in 1993 for both Finland and Sweden; 12.4 in Ireland in 1982; 12.3 in Belgium in 1983; and 9.5 in Canada in 1992. The present cutbacks are identical to the second phase of the Dutch reforms in 1993 and only a little larger than the 6.4 per cent of GDP cut pushed through by Spain from 1993. In each case, the consolidations were painful; in no case did they trigger Armageddon.
There is another way the debate is faulty: of course, slashing the deficit is fundamental to avoiding total meltdown; reducing the share of GDP accounted for by public spending is equally vital. But other forces that have nothing to do with changes in the deficit will also be extraordinarily important in the years ahead, affecting all countries regardless of fiscal consolidation plans. As Ian Stewart, Deloitte’s excellent chief economist, points out in a research note, there is a growing consensus that growth across the rich world won’t revert to pre-crisis rates. We are being hit by a permanent decline in growth, with massive long-term implications for just about everything, from house prices to living standards to the UK’s geopolitical influence.
Tougher regulation and greater risk aversion in the financial sector will permanently reduce credit, while an ageing population will slash workforces. Governments are trying to get their populations to work longer, with much resistance in deluded economies such as France; the UK is trying to reform welfare to boost the supply of labour. But even such measures are unlikely to be enough. The only real answer would be a step change in productivity – output per worker – to compensate for a decline in the number of workers; yet there is no sign of any such revolution.
There is much nonsense around about how Britain is about to enter into a period of Japanese-style deflation. We will actually be contaminated by a different Japanese disease: a shrinking workforce, or at least one that is going up at a slower rate. Demographic factors will slow the rate of growth of the world’s seven major rich nations from 2.6 per cent between 1998 and 2008 to 1.5 per cent over the next ten years. The figures are depressing. Over the last 10 years the average estimate among economists for America’s trend rate of growth has fallen 13 per cent; Germany’s has fallen 30 per cent and Japan’s by 44 per cent, according to the Deloitte research. Over the next five years, the IMF sees the Eurozone growing at only three-quarters of the rate it managed in 1998-2007.
It is time we stopped imbuing politicians and their budgets with more power than they really possess.