There is of course a deluge of comment on Brown’s TUC speech (see yesterday‘s piece). Some are word-counting: Brown used the C word, so he has finally come clean about Cuts. As Brian Groom says, “semantics matter”. Other commentators (Polly waiting for the detail; FT Leader claiming he flunked the test) seem to agree with me thatmore detail is needed. Nothing Brown said gave us much of a clue of what department will lose what cash.
So, just by saying Cuts, is Brown being honest?
I think not. When the Prime Minister first tried to squirm out of the realisation that public spending cuts are inevitable, it was already painfully obvious, as we argued on Freethink. It was a tactical mistake as well as a moral one: given that the public were bound to understand this truth by election day, the Labour party needed to maximise the amount of time to display the differences between their cutting plans and the Tories. Instead, they have allowed circumstances to dictate the pace of this debate. As the FT argues, “But he has made his job harder by initially rejecting the idea of cuts and being so imprecise now.”
But – what about the Keynesian views I have noisily espoused for so long? Surely, the course that displays “judgement” is the one that postpones cuts until the recovery is right (to quote the phrase used by Anthony Painter on Labourlist, which echoes Lord Skidelsky.
Yes and no. Timing cuts for this year or next would be crazy. As Duncan points out, we are NOT getting a big “no” from the markets that lend us the money. As Polly and Anthony argue, large economy finances are not the same as those for a household (it may be different for small economies – see my piece on Iceland’s Littleness). The “demands” that a household generates use up its income; for a country, they may boost its income by employing idle resources, and through associated multiplier effects.
However it takes years to get spending cuts in place, and to make them effective, fair and acceptable to a general public that will be extremely sensitive to fairness, it will take a continuous dialogue between our leaders and the public. Our lead researcher on public spending, John Springford, has been studying the examples of Canada and Sweden, which both went through wrenching fiscal consolidations in the 1990s. Building broad consensus was crucial, and this takes time.
But, I hear you ask, what about Rational Expectations? Won’t the public/business, knowing that the government will be withdrawing support in the near future, draw in their horns, cut their spending in the present, damaging economic demand now? This may be a matter for judgement, as Anthony says, but my judgement is that refusing to discuss cuts is still a bad idea because:
1. Fibbing about it is not managing expectations – it may lower confidence (‘our leaders are in cloud cuckoo land’)
2. Keynesians have good reasons for mocking rational expectation theory, particularly after the crunch. They don’t believe in Ricardian equivalence in one direction, so can’t in another.
3. Financial/credit crunch constraints have already cut private consumption to a low level. So long as people do not lose their incomes (i.e. spending cuts become effective now), consumption will not be affected by the announcement of future spending cuts – and investment is already low, so can’t respond negatively very far.
So. We need a discussion about spending cuts, Anthony (and Gordon): but we need them to actually take place in a few years. I stand by my view that only Vince is being honest so far about it (Bagehot agrees)