Spending cuts – a lesson from Germany?
Today is the day that we find out where the first tranche of spending cuts will hit. No doubt the TUC will have more to say on this as the day progresses. For the moment, I was struck by a story in this morning’s FT, entitled ‘Berlin prepares for 10bn euro yearly cuts’.
The meat of the story is encapsulated in the headline. These cuts will run until 2016 and will be introduced, in part, to comply with a “debt guillotine” that is written into the German constitution.
But two details are particularly interesting.
The first is that the cuts are consistent with repeated promises by German Chancellor Angela Markel and her Finance Minister, Wolfgang Schauble, to reduce their 80bn euro record net borrowing requirement from next year. Yes, that’s right. The cuts won’t be introduced until 2011.
The second is that, in the words of the article, “the scale of the measures was likely to shock the other 15 members of the eurozone” who “were hoping Germany would be the one source of economic growth for the monetary area”.
The opposition Social Democrats have condemned the cuts as an attack on the poor. In an argument with which the TUC would sympathise, the SPD has instead called for tax rises on the bankers and speculators who caused the crisis in the first place.
But leaving aside the question of how the deficit is repaid, this situation in Germany raises two arguments very similar to those that have been raging in the UK.
Firstly, many economists, and certainly the TUC, have argued that spending cuts this year, before the economic recovery is entrenched, would be dangerous and could lead to a double-dip recession. Comparing the situation in the UK and in Germany requires some caution, of course, because no two countries face exactly the same challenges. But this principle argument of progressives, that any spending cuts should not be introduced in 2010, seems to be supported by the actions taking place in Germany.
Secondly, Germany’s eurozone partners recognise that if there are cuts in Germany, this will threaten their own economic growth. At a time when private sector demand remains sluggish, that argument has resonance. And with 60% per cent of UK trade taking place in Europe, this situation affects us too. So let us state the fact, once again, that the cuts being announced today will threaten the UK’s economic growth. The idea that £6bn can be taken out of the economy, before the recovery has taken root, and this will somehow increase, rather than diminish our chances of sustained economic growth, is pie in the sky economics.
Nick Clegg admits that the cuts will be “controversial” (which surely wouldn’t be the case if they were simply efficiency savings) and asks us to judge the Government in five years time. Sorry, Nick, you’re in government now and it doesn’t work like that. If you are complicit in a Government that plunges us back into recession, forgive us if our patience can’t hold out that long!