When Alistair Darling delivers his pre-budget report a week today, he will talk of the outlook for 2010, 2011, 2012 – a stream of years stretching far out into the next decade. But hanging over the entire ritual will be another year, not from the future but the past: 1937.
That was the year Washington declared victory in the battle against the Great Depression, and began cutting spending and raising interest rates. The result was to force a recovering US economy straight back into a slump which was only ended by the second world war.
There is a very real risk that the chancellor will next week repeat the mistakes of 1937. After the biggest financial market crash since 1929, Britain remains in a deep recession – the only economy in the G20 group still shrinking. Banks are hoarding cash rather than lending – which means sound businesses going bust and workers being laid off while graduates and school leavers are locked out of the jobs market and families lose their homes. This is an economic crisis, yet David Cameron and George Osborne are intent on turning it into a debt crisis in which public spending must be slashed immediately (even while taxes are cut for the richest and for business). The state's wrecked balance sheet must certainly be repaired over time; but it is hard to find any economists of standing – whether they are right- or leftwing, working on a City trading floor or on a university campus – who believe that the fiscal tightening need be as rapid or as severe as the Conservatives say. Make no mistake, the Tories' proposals do not stack up economically. But no matter; aided by an uncritical press and a beleaguered Labour party (and, recently, a less than sure-footed Vince Cable), the Tories are winning the political argument. Gordon Brown's big new economic policy is a bill committing the government to halving the budget deficit within four years – even if the economy is flat on its back. As economics this makes little sense; as politics it is just a pointless capitulation to a wrong-headed opposition.
At this rate Mr Darling will be judged next week solely on his plans to reduce public borrowing. This is an untenable position for any government managing a recession, let alone a Labour one. So the chancellor needs to do something radical yet commonsensical: he must speak up for sound economic management.
That means, first, pointing out the need for continuing with a fiscal stimulus while the private sector is pulling in its horns. Slash the debt now, Mr Darling should say, and we will as good as guarantee a repeat of 1937. The world economy remains weak and markets are jittery, as last week's panic over Dubai showed. Second, the government should continue pumping money into the economy. Last year's temporary cut in VAT will soon come to an end; rather than defer its expiry, the government should put the £10bn or so towards fighting youth unemployment. The CBI's idea of a government subsidy for apprenticeships is a good one. Also excellent are the suggestions from David Blanchflower, the former Bank of England rate-setter, to encourage companies to hire more young people by cutting national insurance contributions – and to fund colleges to teach extra students. The PBR should also help foster the UK's economic revival by creating a green bank to finance environmental industries at ultra-low interest rates.
All this is viable if Labour has a realistic plan to reduce borrowing over the longer term. But that must begin from the premise that fiscal tightening cannot happen unless the economy is back to health. Mr Darling should also lay the bulk of any tightening on the rich, through tax rises. A windfall tax on the banks makes sense, given the state support they enjoy; but in time more revenue will need to be raised from taxing property. For too long the economic debate has been driven by a narrow and mean-minded politics; it is time to redress that.
Copyright Speakers Corner 2016