It is pathetic how tamely New Labour has succumbed to competing with the Tories about fighting the next election on cuts. Of course a public accounts deficit of £175-200bn is very large and has to be greatly reduced over time, but not – repeat, not – by premature swingeing cuts when the recovery, if there is one, is still very precarious and when unemployment, bankruptcies and repossessions are still rising. Pro-cyclical cuts of this kind which reinforce the downturn in the economy rather than counter-cyclically seeking to reverse it can only exacerbate the recession and seriously risk turning it into slump. The high jinks in the City about a far quicker return to business as usual than even they had expected should not conceal the risk, probably greater than 50-50, that this allegedly V-shaped recovery could still very easily turn into a double-dip, given that unemployment is still headed towards 3-3.5 million and almost-zero interest rates and unprecedented quantitative easing have so far not triggered the recovery anticipated in the real economy.

There are two very strong reasons why making big cuts over-quickly would be disastrous. One if the experience of two countries which previously did exactly that. One, which is well-known, is that Japan coming out of deep recession after the property bubble burst in the 1990s prematurely raised the sales tax in order to recoup some of the collapsed government revenues over the previous decade and abruptly plunged the economy into a second deeper recession. The second precedent, which is much less well-known, is that Roosevelt brought in the New Deal in the US in 1933 which did indeed begin to revive the economy and bring down unemployment, but then in 1935-6 (having come into office as a balanced-budget man) he turned to direct measures to reduce the swollen government deficit by raising taxes and cutting public expenditure. The recession then started to worsen again and he was forced to reverse engines again in 1937, though it was only the war which finally pulled the US economy out of recession.
The second strong reason for avoiding an over-rapid and counter-productive reduction in the public accounts deficit is that Britain’s debt to GDP ratio is still low by comparison with other OECD countries and as historic experience clearly shows does not at all justify precipitate and drastic cuts. IMF World Economic Outlook figures show that Britain’s debt to GDP ratio was the lowest of the big 6 economies in 2007 before the crunch, is still the lowest this year, and will still on current projections be the lowest in 2014. In 2007 UK debt was just 44% of its GDP, compared to 63% for the US, 64% for both France and Germany, 104% for Italy and no less than 188% for Japan. This year the UK’s ratio is up to only 63%, while France has risen to 75%, Germany to 79%, the US to 87%, Italy to 115% and Japan to 217%. Even by 2014 the UK ratio will only be, according to IMF figures, 88%, less than France at 90%, Germany at 91%, the US at 107%, Italy at 129%, and Japan at a whopping 234%.
Even these figures are put into perspective by what happened in the Second World War. Britain’s debt to GDP ratio rose then to nearly 250%, but fell back dramatically to below 50% in the 1960s as the economy steadily revived. The lesson is abundantly clear: both a policy of panic, to which New Labour seems prone, and a policy of using the crisis to chop back the public sector and shrink the State, which the Tories seem set on, are equally to be resisted at all costs if Britain is not to be made a laboratory for the exercise of political timidity or the ideological settling of scores, at catastrophic cost either way to the population as a whole.

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