The case against Mr Osborne's austerity
Spending cuts will be this government's "poll tax", according to the TUC chief Brendan Barber in an interview with the FT [registration required].
Yesterday I laid out George Osborne's best arguments for pressing ahead with the steepest cuts in public spending in more than 50 years. Today, I bring you the case against - taking each of yesterday's points in turn.First, the anti-austerity school would say, Mr Osborne is wrong to say there is no alternative to his plans. Britain may have a high deficit, but borrowing is already falling, without any help from new spending cuts. In fact, the monthly borrowing numbers have come in below expectations in nine of the last 12 months.
There aren't many economists who support a big new stimulus programme in the UK, but - as this blog noted last week - research by the IMF suggests the UK could have more room to run up debt than many other major economies.
Mr Osborne says the fall in long-term interest rates - government bond yields - since the election shows the benefits of his tougher approach. But investors were choosing the UK over the likes of Spain and Portugal, long before the election.
When bond yields in those countries went up, yields in the UK, Germany and the US have tended to all fall. That has been true since the start of the year.
At less than 3%, UK 10 year bond yields are close to historic lows. We see the same low rates in the US, which has not said how it will cut its massive deficit.
Some say it's a "bond market bubble". Perhaps. But it is difficult to argue that investors are focussed on the size of deficits - or fears of inflation. Those rates suggest, rather, they are betting on a very long period sub-par growth.
The economic data are all over the place: we can't say for sure we're heading for a double-dip. But nor can you take much comfort from the "consensus forecast" for growth next year. In January 2008, only one of the dozens of independent forecasts monitored by the Treasury was expecting any fall in GDP in 2009. And that was months after the credit crunch had begun.
In the wake of this crisis, no-one believes we are looking at the kind of 3-4% growth we had coming out of the past few recessions. That means there will be less room for spending cuts to be lost in the mix: the NIESR estimates that the June Budget will cut growth by 0.4 percentage points in 2011 alone.
Second, the austerity school say that the central banks can always come to the rescue. But, as the Economist recently argued, Ben Bernanke and Mervyn King can't do everything - especially when official interest rates are already at all-time lows, and they have already hugely expanded their balance sheets to help the economy.
At a time when companies and households want to run down their debts and increase their savings, it's difficult for the central bank to force them to borrow.
Third, Mr Osborne says the evidence shows that cutting deficits by slashing spending can be expansionary. But it turns out that nearly all of the countries that feature in these studies [311.35KB PDF] were already experiencing strong recoveries when they started to cut.
There is simply no historical precedent for budget cuts on this scale - across so many countries - in the wake of a financial crisis which may subdue growth.
The Irish example shows the opposite: its government was the first to embrace fiscal austerity, for all the reasons put forward by the coalition. But their borrowing rates have gone up again in the past few months, because investors simply don't think they can grow their way out.
Finally, the government says we need to shrink the public sector - to allow the private sector to climb out from under the dead hand of the state. That's a reasonable philosophical position to take. But this isn't - at bottom - an argument about the proper size and function of the state. It's an argument about how to insure against a disastrous economic slump.
Everyone can agree that it would best for the economy if the private sector took the lead, especially through rising investment and exports. The question is whether this is likely, at a time when most businesses and households want to save, not invest.
In those circumstances, Keynes taught us that the government becomes "borrower of last resort" - whether it likes it or not. That is Britain's true Plan B. If Mr Osborne's spending cuts do push the economy back into recession, tax revenues will fall and other spending will go up - meaning the deficit stays high.
If the government is going to have to prop up the recovery for longer than hoped, surely it is better to choose to do it, through higher public investment, than simply foot the bill for rising unemployment? That is very real risk if the government sticks to its approach.
So much for the case against austerity. Tomorrow: how to decide which side you are on.