Budget blues

Alistair Darling, in an article I can't find now, has been warning that the Tories have failed to learn the lessons of the nineteen thirties and as a consequence risk pushing the economy into a 'double-dip' recession. I'm inclined to agree, although with the caveat that British economic history does not have as many straightforward examples of deficit financing to counteract deflation and rising unemployment as is supposed.

You could argue that it doesn't have any at all. The General Theory was published too late to be of any use to the National Government, even if they had been inclined to accept the ideas contained therein. Keynes himself saw the recovery that came in the wake of rearmament as vindication of his ideas - but this was hardly a normal situation and what lessons it leaves a peace time economy is by no means obvious.

In the fifties and sixties the long postwar boom meant the question of how to address deflation and unemployment didn't arise. Consequently, governments ran slight surpluses most of this period. The behaviour of governments during the seventies - often used to discredit Keynes - ran deficits against a background of rising inflation, something Keynes himself never advocated.

The supposedly self-evident lessons of the eighties aren't quite so clear cut either. Howe's deflationary budget of 1981 wasn't quite as deflationary as predicted because it was accompanied by an expansion of monetary policy. I'm also not clear what the lessons of the nineties are supposed to be. Monetary policy was a result of Britain's membership of the ERM was far too tight - but it's worth remembering that Labour and the Liberal Democrats advocated the same policy so perhaps one of the lessons is to be suspicious of economic consensus? It is also worth remembering that the post Black Wednesday budget saw considerable increases in taxation. Recovery followed because sterling's ejection from the ERM allowed a sharp reduction in interest rates.

Nevertheless, if the rumours of the budget are in anyway accurate, there is reason to think what the coalition is proposing is rather dangerous for the following reasons:

1) I remember the Tories in the eighties always complaining that the Opposition were 'talking down the British economy'. Bizarrely this now seems to be government policy. "You've never had it so bad", seems to be the refrain. It's a game they are playing, obviously - but it strikes me as being a rather dangerous one. Can they really be unaware of how perception can become reality in the fragile world of economics?

2) The right, weaned on simplistic notions of the public sector 'crowding out' private enterprise, are getting all moist at the prospect of public sector cuts. Apart from the fact that this will increase unemployment, they seem oblivious to the demand that the public sector creates for the private. There's the loss of consumer demand to consider but also what about the private contractors that supply the public sector?

3) I can't see where else a fall in demand will be met. There isn't much in the way of scope for loosening monetary policy as there was in the eighties and the nineties and the prospects for export-led growth look pretty grim given that the rest of Europe seems to be following the vogue for fiscal retrenchment.

4) All of the above falls into the "we'll need to wait and see" category but I feel much more confident in predicting a political danger for the Liberal Democrats. Surely Clegg will live to regret his "progressive cuts" line? From what we can gather so far, cuts in corporation tax combined with rises in regressive taxes like VAT and duties on alcohol and tobacco are not going to result in a Budget that is progressive in the sense that the word is conventionally understood.

It seems more likely than ever that the Liberals will again follow the historical pattern and be absorbed into the Conservative party. While everyone is evoking the ghosts of the twenties and thirties it might be worth remembering that Geddes was given free reign to swing his axe by a Liberal Prime Minister. One of the possible beneficial outcomes will be that people will drop this 'progressive' nonsense and be clear, for a generation at least, that opponents of the Conservatives have their proper home in the Labour Party.

See also: this from Peter.