Almost everyone agrees Britain needs to cut its budget deficit. The action is needed whether it is because British government debt is rising at an unsustainable pace; because there is a sizable risk that the cost of servicing each pound of debt will rise sharply; because we think it is unfair our children should fund our profligacy; or because spending much more on debt servicing limits government’s ability to spend money on things we really care about.

The question is how fast. In this big debate, there are two sorts of people: fundamentalists and equivocators.

The fundamentalists include almost all politicians. Gordon Brown insists fiscal tightening now is dangerous for the recovery. On the opposite side, the equally fundamentalist David Cameron asserts that the truth lies with the reverse argument. “To get the economy moving you’ve got to lift the black cloud of the deficit,” he says repeatedly. Business organisations, such as the CBI and IoD are fundamentalists. And many economists have also been overcome with fundamentalist tendencies, as evidenced by the spate of letter writing to newspapers.

The other group are equivocators. These people are reasonably sure there needs to be a credible plan to reduce the deficit, but are unsure about its timing, its effects, and whether history tells them very much. Many Treasury officials I know are equivocators, so was the recent Green Budget from the Institute for Fiscal Studies, so are significant elements of the Monetary Policy Committee and, to my surprise, so is the governor of the Bank of England. Mervyn King is often portrayed as a fundamentalist on fiscal policy, but his answers at the latest Inflation Report (pages 7 to 9) can be summarised as: ‘The effect of fiscal policy on the economy? Well, it depends’. I am also firmly in the equivocators’ camp.

Being unsure about the best policy is rather uncomfortable, feeble even. But I’ll try to explain why the decision is so difficult. Read more