I’ve reread Duncan’s post about 1976. It seems to imply the idea – “Look, capitalists/market-nutters fooled Healey into accepting (presumeably wicked) debt reduction ideas back then – and now, look its the same”. I think Bill may agree with this view. Both are wrong.
The major reason is in this chart – forgive the MBA-instinct to do 2X2’s:
Interest levels back then were so high that the government was obliged to pay more in interest payments as we will in 2012, despite debt being 50-60% of GDP and not 80-90% as we will have.
Another reason – though I need to reread narratives of it – would be about it being an external constraint causing problems in 1976, and not so much now: I think we had had a loan from Europeans, short term, to tide us over, and we were relying on the IMF to replace it. That single, focal point, is different from the gradual and inevitable piling up of debt that we are due to get. Very different timings. Healey had to get something done that year: the “savagery” that Clegg is currently demanding is about a decade of austerity.
In 1976 it was “If the IMF says no the £ is f**ed”. Why they still needed to prop up the £ mystifies me. Inflation, perhaps – it being 20%. The key difference, as Duncan recognises, is inflation.
In 2012, it will be “the market says no. Your interest payments are going to go through the roof”. Different
Callaghan was right that they could not spend their way out of recession. 1977-8 were not bad years, and Healey’s spending cuts did not wreck the economy – quite the opposite, in his autobiography he describes himself as something like “walking on air” the next year, generally regarded as a God amongst finance ministers (then he would. But he certainly did not lose his credibility – he was a near-favourite to be next leader, even considered a few weeks before the 1983 election). Sometime spending cuts CAN improve an economy – it depends on whether we are suffering “depression economics“.
Callaghan was right because (a) the mid 1970’s shock was a supply shock – oil – and therefore (b) we were at our economic capacity limit. Again, totally different – (c) i nflation again makes the biggest difference – it determines where we are in the 2×2.
The Labour government having some fanatical public spenders is also a major difference. As is the cause of the trouble: a different governement (the Barber boom, the most extreme ever) could not have been worse timed given the impending oil crisis.
Finally, while I agree with the general scepticism of long range projections of anything, I think we can be VERY confident that deficits will be enormous in 2010-3010 if we don’t adjust. The revenue we relied on have definitely gone. Vital variables like City turnover, housing market turnover, capital gains, unemployment levels, levels of higher incomes for tax purposes – all of these we can know pretty well. The Treasury is better at this now. I would love to see Duncan, or anyone, sketching a fiscal pathway based on current policies that will not cause very large deficits. The forecasting error of 1976 does little to undermine this certainty, I reckon.
(sorry this is rushed. Bad grammar etc. Lucky wife is not divorcing me).