Britain is not Italy, Greece or Spain. George Osborne will want us to cling to that thought when on Tuesday the chancellor of the exchequer gives parliament his assessment of the economy. Whereas those countries are paying about 7 per cent for new debt, the UK borrows at about 2 per cent. While some of our continental neighbours contemplate economic ruin, we have no difficulty in funding our deficit.
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The chancellor claims that this happy position owes everything to the government’s commitment to reduce the structural deficit. There is evidence to support him. When the 2010 general election produced a hung parliament, senior civil servants pleaded with the party leaders to form a government quickly, for fear that Britain would be unable to sell its gilts and would lose its triple A credit rating.
The argument convinced Nick Clegg, who within a few hours accepted that the Conservatives had been right to argue for reducing our borrowings faster. He committed himself to the coalition and an austerity programme. The government’s determination impressed the markets. Gilts have sold smoothly, our credit rating is intact and sterling has been steady.
For the Labour party, Ed Balls argues that cutting public spending and raising tax depress growth. Well, of course they do. But, as the coalition would retort, without such severe measures, the markets would rank us alongside the Mediterranean countries and like them we would be contemplating the abyss.
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However, the government hardly feels comfortable with our economic progress. Spending cuts and tax rises were designed to calm the market and to shrink the state, leaving light and air for the private sector. Mr Osborne always knew that in themselves those measures were insufficient to tackle the deficit. For that we needed growth.
If this were a standard post-war recession, the economy would by now be racing to recover lost ground. We could expect several years of growth above trend. The unemployed would return to jobs, pay would boom, and the Treasury’s coffers would swell with tax receipts. But this depression is shaped like that of the 1930s, when for most of the decade growth was below trend.
So, the government is realising that throughout the parliament gross domestic product may remain flat. Over these five years many will lose their jobs. Pensions will be cut. Benefits and pay settlements will fall behind prices. The nation will endure all that, and at the end, the deficit will still tower over the economy. It’s not a cheerful prospect for the Conservatives and Liberal Democrats, whether seeking re-election together or separately.
They have two hopes. First, the country seems to have decided that Ed Miliband is not prime ministerial, and from the evidence of Neil Kinnock, William Hague and Michael Howard, leaders of the opposition find the electorate’s opinion, once formed, hard to alter. Second, the coalition leaders may hope that, like Margaret Thatcher, they will be credited with having done the difficult but right thing, and be re-elected despite their unpopularity. They can take inspiration from Meryl Streep’s performance in The Iron Lady, which certainly reminded me of what true grit looks like.
Paradoxically, the low rate of interest that Britain pays on its sovereign debt throws up a political problem for the government. For not everyone agrees that it results from the coalition’s impressive austerity. It is pointed out that the US, without a convincing deficit reduction programme, can also borrow cheaply. Conversely, a state strongly committed to tough measures – Spain – is paying 7 per cent. The key may be that money is readily on offer to a sovereign state that has its own currency. The exchange rate will adjust to economic reality, allowing a country to trade out of its difficulties, even if its deficit is large. In which case, why shouldn’t Britain indulge in a little fiscal stimulus?
Mr Osborne has to weigh up whether our felicitous standing in the markets is a prize won at enormous cost that it would be folly to sacrifice, or whether lenders are pleading with him to borrow more and stoke recovery.
The signs are that he will not waver. Ministers may be nervous, but the government looks steady. It was impressive that during the Liberal Democrat conference, despite pressure from the membership to put distance between the two parties, Mr Clegg and Danny Alexander, the chief secretary, maintained a robust defence of the austerity package.
It must cross ministers’ minds that the grim prospect of five years without growth should now be regarded as the most optimistic scenario. It takes no account of what may happen if the euro falls apart in disorder. So it may seem logical that the government’s policy is to wish the single currency well and urge the eurozone to use all measures to save it, such as requiring the European Central Bank to act as lender of last resort and accelerating moves towards fiscal union. But now that it is clear that countries such as Spain are paying crippling interest rates precisely because they are shackled to the euro, it is at best perverse to will the currency to survive, and at worst immoral, given the impact on unemployment and other human miseries. Moreover, how exactly a continental fiscal union dominated by Germany could be in Britain’s foreign policy interests eludes me.
If we weather these prolonged economic doldrums, Britain will find itself at the start of a process. The recession affecting the west – but not the east – surely indicates that the old industrialised world now fails to compete with the new. China’s sovereign wealth fund told the Group of 20 summit that it was disinclined to invest in Europe because welfare systems are out of kilter, encouraging indolence and sloth.
Britain will have to reduce welfare and public sector employment dramatically. The state will need to step back from education and health where it simply doesn’t do a good enough job. Such changes may be too draconian for a coalition, yet the public may find them too radical to accept from a single-party government. The only question, however, is whether we will tackle those big issues soon, or merely ensure prolonged stagnation by postponing the inevitable.
The writer is a former Conservative cabinet minister