Just before Alistair Darling finished his budget speech yesterday, he made the following supremely fatuous comment:
You can grow your way out of recession. You cannot cut your way out.
The first statement was an oxymoron. If an economy is growing, then it's not in recession. If it is in recession, then it's not growing. The second statement is just plan wrong. If an economy has a large public sector, which crowds out and weakens the private sector, then cutting public expenditure will stimulate growth.
In the mid-1980s, the Irish government provided an excellent example of the merits of public expenditure cuts as a pro-growth strategy. After a decade of appalling fiscal deficits, it introduced a highly successful expenditure reduction programme, which re-established long run fiscal sustainability, and laid the basis for 10 years of solid economic growth. In fact, the Irish experience introduced a new concept - the expansionary fiscal contraction. Of course, the Irish ruined everything by pumping up a huge and unsustainable housing bubble, but that is another story.
However, this is not my main objection to Darling's foolish play on words. He displayed the typical New Labour tactic of posing an irrelevant question in order to deflect from the root of our economic difficulties - debt. Darling wants to distract us from New Labour's continuing contribution to the UK's horrific debt levels.
Households and firms owe too much, while the banks have too many loans that are unlikely to be repaid. Rather than go through the painful process of unwinding this debt, which necessarily involves an deep recession, Darling thinks he can escape the consequences of New Labour economics. The answer, absurdly, is more debt. The public sector, he believes, can take over as the borrower of last resort, and keep the economy growing. He has co-opted the Bank of England, who have obligingly cut interest rates to almost zero.
Eighteen months into this crisis, and this strategy has failed miserably. The economy has already slipped into a nasty downturn, while unemployment is rising. Darling would no doubt argue that things would be so much worse if the government hadn't stepped in, raised borrowing and kept aggregate demand high. This brings us to the second highly dubious tool of the discredited politician - the counter factual. "Things are bad, but there would be so much worse without me."
Indeed, the situation is bad, and Darling made it worse with his reckless budget yesterday. Even under the best case scenario, New Labour has bequeathed this country a decade of historically unprecedented fiscal problems. In the worst-case scenario, the UK could be slipping towards a fiscal crisis, where financial markets question the long run solvency of the UK government and refuse to finance this profligacy.