Voters do not of course have infinite knowledge and occasionally you have to trust your instinct. Rarely has this been more the case than in the last election with the timing of the cuts. Alastair Darling made a persuasive sounding case – and is still making it – that we shouldn’t endanger the economic recovery by cutting spending too soon.
For me part of the judgment was a speech made by that non-economist Prime Minister James Callaghan, some 35 years ago. It went something like this: ‘We used to think that we could simply spend our way out of recession.... I have to tell you in candour that that is not an option..’
So if it was Labour Party policy in the 1970s, why isn’t it now? Why does Alistair Darling insist that in the teeth of a recession public sector spending had to be maintained?
But one of the most telling arguments for immediate cuts came just yesterday, with scarcely any coverage in the newspapers. It was that one member of the Monetary Policy Committee of the Bank of England, which sets interest rates, had voted to increase the rate. OK, their are eight members of the MPC (usually 9, one seat is vacant – why not apply?) but this is the start, the first rumblings which George Osborne with his budget will seek to assuage.
The difference between the markets quietly swallowing our debt, as they have done since Waterloo, and just holding back a bit, humming and haa-ing, is psychologically tiny. It might well be influenced by other factors, such as a similar country falling into difficulty, but the effect is dramatic. Whilst the deficit at £155 billion is massive our total debt, including unfunded public pensions, is £1.3 trillion; that is £1,300 billion. Every one percent extra on the cost of this is going to be £13 billion, which is more than Osborne reduced welfare by over four years. More than the VAT increase. And Spain pays 2.5% more than Germany on its debt.
And now there are the first suggestions that the cost of servicing this debt might go up. In my view it would certainly have done were it not for Osborne’s cuts.
In Continental Europe the story is a little different. There is a furious comment by George Soros in the press today to the effect that Germany should pursue economic policies for the rest of the eurozone, rather than just to suit itself. But why? Poor Mrs Merkel, unpopular abroad and at home (it seems the German President resigned because he simply couldn’t stand her) is trying to do what is best for Germany. The only reason her coalition hasn’t collapsed is because nobody is ready with an alternative.
The fact remains that Germany has in the past been prepared to take difficult action economically and will in the future. The rest, with a couple of exceptions, have swept the matter under the carpet, hoping, without mentioning that hope, that the Germans will pay. One analyst, quoted in the Telegraph, said that either Germany does more to boost liquidity, in which case it will set off inflation in Germany and cause Germany to leave the euro: or they don’t ease liquidity, in which case it will lead to deflation in Southern Europe and force them out of the euro.
That is an increasingly voiced opinion. At least the UK is in control of its own destiny.