Ed Balls and Martin Wolf: why the Government’s economic policy is wrong
Ed Balls made a speech to Bloomberg last week, and Martin Wolf commended his argument in the Financial Times today. Both are worth reading in full, but for the time-challenged, here’s a summary. Government policy rests on four pillars: Labour is to blame for the UK’s economic problems; the Government needs to cut expenditure massively because the markets are nervous of continued borrowing; lower government expenditure will lead to increased private sector spending which will create growth; and people who disagree with the Government are ‘deficit deniers’ who would wreck the recovery.
All four are (at least probably) wrong. Here are the rebuttals, in brief.
The current economic position of the country is the result of the global financial crisis (there is an argument that liberalisation in the finance sector caused this, and Labour are responsible for that – but it was the Thatcher Government that started to liberalise).
All the evidence is that the markets are not worried about UK government borrowing – Greece, Spain and Ireland are all facing market jitters over their recessionary budget cuts, instead.
There is little evidence that, with global demand still weak, private sector investment will create jobs even to compensate, let alone outpace, the cuts in employment resulting from reduced government expenditure.
And, finally, if all the previous points are valid, the ‘deficit deniers’ are actually right – you get the distinct feeling that Martin Wolf’s (quiet) outrage is mostly the result of being lectured about economics by George Osborne.
Despite the hugely cogent argument advanced by Balls and Wolf (and, for over a year now by … ahem … the TUC), the real political poser is this. Will the public desert the coalition as the cuts develop from proposal into grim practice? Or will the superficial intuitiveness of treating the public finances as if they were household finances (a problem identified by Keynes in very similar circumstances) mean that while people oppose cuts which directly affect them, they fail to translate that into generalised opposition to the Government’s overall economic policies?