The Tories: Putting the Recovery at Risk

The Tories: Putting the Recovery at Risk
Immediate cuts in 2010

• Rather than maintain planned spending, the Conservatives are committed to taking money out
of the economy in just a few months time – pulling this support would put the recovery at risk.

• For the financial year 2010/11, the Government has set out a clear plan for public spending,
with total government spending rising from £675.7bn in 2009/10 to £706.6bn in 2010/11, an
increase of £30.9bn.

• With relatively weak private spending, maintaining government support is crucial to securing
economic recovery. The Conservatives have said they do not support the 2010/11 spending plan
and instead they would take money out of the economy in just a few months time;

“Now I think two things, one is that we should start earlier. 2010, this coming year, we should make some reductions in public spending programmes, we should get on with it because it’s all very well having a plan to halve the deficit, we can all have plans for the future.” David Cameron, Sky News, 22
February 2010

“We know they are now going to have a budget. Well, the test for that budget will be do we tear up the spending plans announced for 2010 and actually start making some progress in reducing those plans.” David Cameron, Press Conference, 25 January 2010

Criticism from experts

• On February 19 2010, more than 60 leading economists wrote to the Financial Times to warn of
the dangers of cutting public spending before the recovery is secure.

• In the first of two letters, eminent figures such as Professor Richard Layard of the LSE, Professor
Robert Solow of MIT and Professor Alan Blinder of Princeton University, described existing government spending plans as “sensible” and argued that more immediate and drastic action would be “positively dangerous”. In the second letter, Professor Skidelsky of Warwick University, Professor Robert Rowthorn of Cambridge University, Professor Brad DeLong of UC Berkeley and other international economists argued that the government’s first priority must be “to restore robust economic growth” and that the timing of measures to reduce the deficit should be determined by the strength of the recovery:

“A sharp shock now would not remove the need for a sustained medium-term programme of deficit reduction. But it would be positively dangerous. If next year the government spent less and saved more than it currently plans, this would not “make a sustainable recovery more likely”. The weight of evidence points in the opposite direction.” Lord Layard et al, Financial Times, 19 February 2010

“There is no disagreement that fiscal consolidation will be necessary to put UK public finances back on a sustainable basis. But the timing of the measures should depend on the strength of the recovery. …But for the good of the British people – and for fiscal sustainability – the first priority must be to restore robust economic growth.” Lord Skidelsky et al, Financial Times, 19 February 2010

• Getting the recovery properly underway is central to reducing the deficit in the coming years. As
Dominique Strauss-Kahn of the International Monetary Fund has set out, there is a “delicate balancing act” as to when to reduce spending without creating a “double-dip” recession. The point has been echoed by, amongst others the CBI, IMF, international financier George Soros and the independent Institute for Fiscal Studies.

“Let me address some of these challenges. I‘ll begin with exit strategies. As the recovery gathers steam, the question of when and how to exit from the accommodative fiscal, monetary, and financial sector policies will top the agenda. Exit too soon, and you kill the recovery. Exit too late, and you sow the seeds for the next crisis. As I said, it will be a delicate balancing act. Right now, I think it is still too early for a general exit. Exit should instead await a sustained recovery in private demand, as well as entrenched financial stability—a key litmus test. We recommend erring on the side of caution, as exiting too early is costlier than exiting too late.” Dominique Strauss-Kahn, Managing Director, International Monetary Fund, Speech to the CBI, 23 November 2009

“Let’s be clear, we’re completely not political and, I don’t think of myself as shouting Mr Osborne’s song here. No, what we feel is that the public finances have to get back on to a more stable course over time. I think the Government is right to say that it would be a bad idea to slam on the brakes right now because the economy’s still so fragile.” Richard Lambert, CBI Director General, Radio 4 Today Programme, 26 January 2009

“I think that since the adjustment process to the recession is incomplete, there is a need for additional  stimulus. The political resistance to it increases the chances of a double dip in the economy in 2011 and after that.” George Soros, Guardian, 27 January 2010

Robert Chote:
So our view is that, given the continued fragility of the economic recovery, the fact that monetary policy is very loose, that it doesn’t make sense to announce more tax increases or spending cuts that would take effect over the course of the coming year.

Martha Kearney:
So the Conservative pledge to go further and faster then the government this year is unwise, do you think?

Robert Chote:
Yes, we are basically saying that there is a good case for further over the course of a Parliament but not a particularly good case for going further over the course of the coming year. The World at One, BBC Radio 4, 03 Feburary 2010

• Not only are the Tories isolated internationally, they are isolated among the mainstream political
parties in wanting to cut immediately:

Andrew Marr:
Are we close to a double dip, do you think, recession?

Vince Cable:
That's certainly a risk, and what any incoming Chancellor has to bear in mind is that on one hand we need to maintain market confidence - absolutely crucial, the country has to be financially responsible and being seen to be responsible dealing with the deficit - but equally we've got to have recovery, we've got to have growth because unemployment is going up and if we don't have economic growth then the deficit actually gets even wider. And that's one of the reasons why I'm very much opposed to the Conservative approach of rushing into cuts without … regardless of the condition in the economy. That's not sensible. Vince Cable, Andrew Marr Show, 7 March 2010

• Even David Cameron when under pressure has had to admit that “if you do too much too early, you would choke off some demand”, although his judgement is that there should be a reduction in spending in a few months time. His nominee for advice on public spending, Sir Alan Budd, has also warned that “if you go too quickly then there is a risk that the recovery will be snuffed out and we will go back into a recession.”

“During Tuesday's interview, Mr. Cameron called for tackling the deficit aggressively. But he added:
“Of course, there is a danger, if you do too much too early, you would choke off some demand.” Thus far it has been the Labour government, aiming to draw battle lines before the election, that has warned against rushing the deficit pullback.” David Cameron, Wall Street Journal, 9 December 2009

“If you go too quickly then there is a risk that the recovery will be snuffed out and we will go back into a recession, this is when the Americans say, 'Remember 1937'’ Sir Alan Budd, Dispatches, 9 March 2010

Economic precedents

• The Conservatives’ proposal to begin fiscal consolidation immediately ignores some of the most
cautionary tales of past recessions, where modest recovery was followed by further quarters of negative growth, usually caused by tightening fiscal and monetary policy prematurely.

- In Japan, in the period since the early 1990s, over tightening fiscal policy at the wrong time has contributed to double dip recessions;

- the U.S. did likewise in the 1930’s and 1980’s;

- the UK in the 1980’s saw a recovery undermined by fiscal policy.

- And the Swedish recovery, which coincided with a tight fiscal consolidation, benefited from a far more benign global economic environment that offers warnings about when rapid fiscal contraction is appropriate.

• These historical recessions have therefore informed the expert view today that tightening fiscal
policy too soon is a greater risk than tightening it too late.

“History is littered with examples of premature withdrawal of the government stimulus, from the US in 1937 to Japan in 1997. With people’s livelihoods at stake, a responsible government should avoid reckless actions.” Lord Layard et al, Financial Times, 19 February 2010

“The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently. If the government withdraws support too early, a return to economic decline or even panic could follow.” Professor Christina Romer, Chair of President Obama’s Council of Economic Advisors, The Economist, June 18 2009

[George Magnus and Mansoor Mohi-uddin of UBS] warned against following the example of the Thatcher government of 1981, which tightened fiscal policy aggressively as Britain was barely out of recession. At that time, the 364 economists who protested against it in a letter were forced to "eat humble pie", but Mr Magnus and Mr Mohi-uddin, said the fiscal backdrop was very different then. "There was no global economic shock, no dysfunctional banking system, no private sector deleveraging underway, and the government was able to take advantage of two important phenomena: the weakening of power in organised labour, and the fact that the economy is now known to have been recovering more or less around the time of the Budget," they said. Daily Telegraph, 25 February 2010, http://www.