For the first time since his election as leader of the Labour party, I found myself agreeing with Ed Miliband during Prime Minister’s Questions this week.
With his new Shadow Chancellor sat next to him and in response to the news earlier in the week that the economy had contracted by 0.5% during the final quarter of 2010, Miliband urged David Cameron to think again over the upcoming spending cuts and VAT rise.
To make matters worse for the Coalition, the outgoing director-general of the CBI accused the government of putting politics before growth. Sir Richard Lambert argued that “politics appear to have trumped economics on too many occasions over the past eight months”.
And I have to agree. Yes, the deficit needs to be addressed, but the economy also needs to be given time to recover and grow. Unemployment is still increasing, inflation is rising and wages are stagnant. The problem is that it’s very hard to sort both problems at once.
The Coalition seems to have become obsessed with the deficit—something that was true of Osborne and Cameron in the run up to the election—and has taken steps to reduce it. So far, these steps have primarily comprised slashing public spending by almost a fifth and increasing VAT to 20%.
These policies have started to take grip now and their effects will be seen in GDP figures during the coming years. What we are yet to see, however, are any policies for encouraging growth. Yes we have a Green Investment Bank on the (distant) horizon and a lot of talk about encouraging small businesses, but there is no equivalent to the relatively speedy action taken on the deficit.
By attacking the deficit so quickly, the Coalition risks stifling growth for years to come. Two of the determinant factors for GDP are government spending and consumer spending. But the measures so far introduced will decrease both of these.
By cutting government spending, you reduce government contracts. Government contracts are vital in encouraging growth as the money feedbacks into the economy. Firms make money, they contracts create jobs. People get paid, and then people spend their money and pay taxes. Welfare costs decrease.
By increasing VAT, at a time when the cost of living is increasing and wages are stagnant, the spending power of consumers is decreased. Less money is spent, demand is lower, and there are less jobs and lower growth.
The reductions in public spending will remove just under half a million jobs from the public sector. The Coalition is confident that the private sector will more than pick up this tab. What is the basis for this confidence? As Sir Lambert asked “where’s the growth going to come from?”
The old saying “you have to spend money to make money” is surely never truer than when applied to governments during recessions. The deficit needs to be brought under control, but it is a question of timing.
The Lib Dem manifesto reflected this sentiment:
“We must ensure the timing is right. If spending is cut too soon, it would undermine the much-needed recovery and cost jobs. We will base the timing of cuts on an objective assessment of economic conditions, not political dogma.”
And in a statement issued at the beginning of 2010, Vince Cable responded to news that the economy had grown by 0.3% that:
“This news underlines again the folly of rushing into rapid cuts which could push the economy back into recession and inflict further structural damage on the UK, making it harder to sustain our credit rating and creating an even larger budget deficit.”
Unfortunately, it seems that when it comes to these matters, either the Lib Dems in the cabinet have changed their minds, or economic policy is being dictated to them by the blue side of the coalition.
The misguided notion that by tackling the deficit first you can encourage growth because market confidence will be that much stronger ignores the importance that consumer spending plays in economic growth. It also misses the more human consequences that high unemployment and rising prices accompany.
To make matters worse, both the stagnating economy and the deficit reduction tactics will hit the most disadvantaged hardest. As a member of a party founded on equality and fairness, this is a bitter pill to swallow.