The sharp division in economic policy between the Budget deficit cutters and the optimisation of economic growth leaves many commentators on the sidelines. Economics is about the taking of risk and it is apparent to all commentators that there are grave risks on both sides of the argument. Is it a case of damned if you do or damned if you don’t? And is it possible to clear away the fog of confusion by posing and answering some questions. Yes, I shall attempt ten of the more obvious.
1. What would have happened to exchange markets and confidence in the British economy in general had there been no Coalition Budget? Nothing, nothing at all. Labour had already acted to reduce the deficit, it is coming down, and there were measures in the pipeline to cut public expenditure and an increase in National Insurance Contributions had been pencilled in.
2. Are you sure about that? No,of course not. There would have remained an element of risk. A prudent incoming Labour Government would probably have had act in some minor way to cut the deficit in 2010/11 and to spell out its intentions in greater detail. It would need to do this because of the rush of the Gadarene swine.
3. Will the Budget measures lower economic growth and increase unemployment? Yes, but Sir Alan Budd thinks that the immediate economic effects would be small. However, in his latest Budget Forecast he does not take into account the additional and substantial public expenditure cuts and tax increases expected later in the year. When these are shoe-horned in the effects will be substantial: possibly more like a growth rate of 1.0-1.5 percent and unemployment greater than 3 million, an increase of 500,000 over current levels.
4. What would this do to Government Budget deficit targets? They would be difficult if not impossible to achieve in the Govenment’s time scale of four years. They would need to be abandoned or modified in some way.
5. Would the economy revive toward the end of the Parliament? This is dark territory. The outcome depends on such considerations as the growth in world trade and in the Eurozone in particular. Probably growth would rise slowly from a low base.
6. So what would be the economic outcome? Probably, the Government will not achieve its planned Budget deficit reduction.
7. When will it be apparent? Summer, 2011.
8. Is there a Plan B? No. As interest rates are low, the only monetary stimulus possible would be further quantitive easing by the Bank of England. This is the weakness of Boy George’s position, and the strength of Alistair Darling’s, and makes the Coalition choice of dramatic cuts riskier than the alternative.
9. So what is most likely to happen? Politics will take over. The Coalition will collapse and there will be another General Election. Pencil in October, 2011.
10. What will happen to the Lib Dems? The Lib Dems will split with one third of the party remaining with the Tories, including Nick Clegg, and the balance under Vince Cable going it alone.
Disagree? Tell me why?