Andrew Lilico: Stick to the course, Mr Osborne. Don't let Ed Balls bore you into submission

By Andrew Lilico

Do we have to go through this again??  What's Ed Balls' plan - that if he bores us enough by repeating the same "Plan B" thing over and over and over again, eventually we will get so bored we'll say: "Look!  We'll do it your way if you'll just, for pity's sake, talk about something else!"?

This debate is over.  It has been over for about eighteen months.  The real plan A / plan B discussion is not whether we hang back on deficit reduction; it is whether, if matters do not turn out as well as the government forecasts (which they probably won't) we shall need to do more cuts and earlier cuts.  That is perfectly plausible - it is, indeed, what has happened almost everywhere else that people were running 10%+ deficits.  It is very hard to get a deficit reduction plan on this scale right first time.  The near-universal tendency is to aim to do the minimum possible initially, in the hope that things will turn out for the best, and when they don't one ends having to do more.

The Coalition deficit reduction plan was not perfect - nothing is in politics.  I would have preferred to see the spending cuts front-loaded and the tax rises rear-loaded, to have seen the basic rate of income tax rise not VAT, to have seen the NHS ring-fence abandoned, and to have seen smaller cuts to defence spending.  But these are quibbles.  In essence, this is the plan I argued for.  It is the absolute minimum that could be done credibly.  And it is not the end of the discussion about public spending. 

Once we have the first £80bn off spending, we shall have solved the financial - the mathematical - requirements of our situation, and can then have a proper philosophical discussion about the balance of spending in the state - do we want a 42% state, a 38% state, a 35% state?  The first £80bn isn't about anything ideological.  It is simply about preventing the state from becoming so large, relative to the economy, that it retards growth so much that wages do not rise, households default on their debts, and the banking sector collapses.

Not everyone agrees with me in this.  There is a genuine - if decidedly minority - position amongst left-leaning academic economists who believe that Keynesian fiscal stimulus works even at a 10% of GDP deficit when spending have suddenly risen to 50% of GDP over a three year period.  They, of course, have no evidence for this - it's never happened, in peacetime, that a developed economy ran a 10% deficit and subsequent analysis suggested that a 12% of GDP deficit would have been better.

The Observer letter suggests that taxes on the rich could somehow deal with the deficit.  That's just preposterous.  The rich don't have enough money to deal with this.  Furthermore, quite contrary to what they say, all the evidence is that deficit reduction programmes work best when they are focused on spending cuts.  The standard international rule of thumb, endorsed by the IMF and OECD and the leading academic studies, is for 80% of deficit reduction to be via spending cuts, and 20% via tax rises.

There is an alternative to the Coalition's strategy, and we may well see it implemented: more spending cuts; earlier spending cuts; more and earlier tax rises.  That's likely if the economy does not perform as well as hoped.  It would, however, be much more likely if we were to slow down on deficit reduction, because in that case economic growth would be slower (since we would carry more of the anchor of excessive state spending) and bonds markets would be very nervous about the government's fiscal plans' robustness to any sort of downturn, leading to bond interest rate rises - if not this year, then when the next recession comes around in 2013 - and we would fairly quickly find austerity imposed upon us, at a pace not of our choosing, by those that lend us money.

Stick to the course for now, Mr Osborne.  Don't let Ed Balls bore you into submission.  If you do eventually need to tack, there is only one credible alternative direction: tighter and faster.