This past week, both the Prime Minister and the Chancellor have taken to the airwaves to boast that the coalition government’s ‘tough but necessary’ action in tackling the deficit has pulled it out of the danger-zone in which it lay when they took office, at the mercy of the bond and currency markets who would not tolerate such levels of government borrowing any longer. On the Today programme on Monday, George Osborne claimed that as a result, Britain would be spared the fate of Greece and Ireland.
That comparison with Ireland followed the increasingly desperate news that the former Celtic Tiger is sinking further and further into the quicksand of a deflationary spiral; the more the Tiger lashes out, the further it sinks: further cuts in public spending will be undertaken in order to chase the tail of a deficit that is running out of control precisely because cutting government expenditure during a recession creates a ‘death spiral’, as the economist David Blanchflower calls it, in which the cuts put people out of work, which lowers aggregate demand, which lowers growth, which lowers tax revenues, which widens the deficit, which results in more cuts and so on. Ireland is clearly in that death spiral right now, so it is not surprising that the Chancellor tried to contrast its fate with that of the UK.
But those of us with memories that go back beyond one news cycle will remember that when the coalition took office, a crack team of Treasury officials were despatched by Osborne and Cameron across the Irish Sea to see what lessons could be learnt from the way in which the Irish government had launched a massive, and punitive, programme of spending cuts. For the scale and speed of the cuts, the Emerald Isle was lauded for its courage, a paragon of neo-liberal virtue that would stave off economic disaster and keep the markets from drawing blood. One of the most enthusiastic cheerleaders was the IMF, which continues – in the face of Ireland’s disaster – to recommend the same medicine for the UK.
Well, it hasn’t worked out like that, as any serious economist knew – economists like Blanchflower, Robert Skidelsky, Joseph Stiglitz and Paul Krugman (it is noticeable that Ben Bernanke, the Chairman of the Federal Reserve, is not convinced of the merits of cutting when growth is so fragile – and he should know since he has been described as perhaps the greatest living scholar of the Great Depression). In fact, as Blanchflower pointed out in his New Statesman column last week, the recession has deepened, the deficit has grown and as a result the cost of borrowing for the Irish government has actually risen not fallen because of the very economic policy that the coalition seems determined to imitate. And yet, Osborne and Cameron (who apparently scored a first class honours degree in Philosophy, Politics and Economics – did he even turn up for his economics classes?) continue to insist that the deficit has to be tackled, and tackled quickly, because its size means that Britain can no longer afford the cost of borrowing such large amounts. Hey, George, you’ve got a rude shock coming.
True, the cost of borrowing is lower now, but that is because Britain never was likely to become the next Greece; firstly, it has never defaulted on its debts, and has thus acquired good credit history, as it were; and secondly, because the economy has been growing (albeit ever so slowly) – a legacy of the last government, not this one. If that growth stalls, or goes into reverse, then thanks to this government, it is likely to become the next Ireland.