Is the ‘Dash to Slash’ Really Necessary – Alternatives to Austerity


The current “dash to slash” consensus is deeply troubling. The mantra has been repeated so often now, by so many people, that all critical thought about the subject seems to have been set aside.

Even those who oppose how the current government is wielding the knife, like former Chancellor Alistair Darling, concentrate not on whether it should be done at all, but merely on the threat of a double-dip recession if it’s done too fast and too far (but with the emphasis very much on timing rather than scope).
So just how necessary are cuts, and are there alternatives?

Let’s be clear, Britain was spending more than it brought in in taxes before the  crisis hit in 2008. But not hugely more, and the deficit was perfectly sustainable. Contrary to the populist “the governments budget is just like your household budget” myth, it isn’t. Well, except in one way it is, if your a house and mortgage owner. We all know that what started out a big mortgage a few years back often shrinks to much more manageable proportions over time. The same is true of government debts, and it does tend to depreciate. Which is why some governments have more or less always been able to run a (smallish) budget deficit. The Coalition government seems to think that we have to get the deficit down to zero, but frankly that’s an ideological decision, not an economic one.

Germany, often held up as an example of an economy that was more cautiously and successfully managed, both before and through the current crisis, ran a gross debt of about 64% of GDP for the 14 years from 1995 – 2008 (i.e. before the crisis hit). Britain’s debt over the same period averaged 47% of GDP, more than a quarter less than Germany’s. And, incidentally, whilst Britain’s growth rate slowed during this period, Germany’s accelerated. So much for public debt ‘squeezing out’ growth.

One final point on debt – the “markets” are not, contrary to George Osborne, too worried about debt levels in Britain. They know they are not really that bad. They are more concerned about what happens long-term if Britain cuts too much – see what has happened to Ireland’s credit rating.

Governments have another trick up their sleeves to reduce debts to manageable proportions – converting them into longer-term bonds. I’ve already pointed out that we did just that with Lend-Lease during the second world war, without which we’d have gone broke and lost. We also did it, several times, in order to nationalise industries, like coal for example. In both cases we took decades to pay off the debts, and no one noticed very much.

So some sort of “Bankers Bond” would be an option (as well as a good way of making it clear where the real blame lies for most of our current problems). Especially in turbulent times, and whilst we have ridiculously low interest rates for savers, solid government bonds are popular and will remain so.

The third major way of eliminating the deficit, and the debt, is to raise taxes. Because of the legacy of Thatcherite tax-slashing, British politicians are reluctant to raise the issue at all, so the debate about the balance between taxes and cuts as a solution has been restrained to the point of near extinction. Of course, there would be possible unwelcome economic consequences if taxes were raised too fast or too far, just as there may well be for cuts. But a long term strategy to raise the overall tax take to sustain a level of public benefits and services that most of us seem to want would not have dire consequences. Britain is a relatively low tax country. You could even tie a special levy on the banks to paying off the Bankers Bond?

Does all this means we don’t need any cuts in public spending? No, I’m not so naive as to think we can just carry on as if nothing has happened. But again, there are ways of reducing spending without necessarily cutting services, or at least not too much.

The Big Society idea touted by David Cameron does actually have a germ of good sense in it, and it’s not new either. The idea of an increasing need for what in the jargon is called “co-production” of (some) public services has been around for quite a while now. Some problems simply cannot be solved by “statist” actions alone – many health problems require life-style changes the NHS can never deliver, not how big it’s budget. And it’s is arguable that we have become, in Britain anyway, far too reliant on a statist way of solving social problems. The cooperative movement was founded, by socialists not Tories, precisely in order to develop ‘self-help’ solutions.

The problem with the current governments’ dash to slash is that it will undermine precisely those things that might enable some less statist solutions to develop – subsidies to local charities, for example, are already being slashed. Moreover mobilising the sort of ‘social capital’ implied by the Big Society is not a short-term project, studies show that it develops over decades rather than years. So even if it can be created (and some have doubts about governments ability to do so) it’s not likely to do anything more than marginally affect current provision of social welfare and services. Claims that some are making of 20%, 30% or even greater, levels of ‘radical efficiency’ savings from co-production type developments are far fetched and unrealistic.

None of the above solutions, by themselves, will solve our current problems. But intelligent use of all of them could certainly ameliorate the need to radically roll back the social state we have created and sustained since WWII. Does anyone really think that Britain, in the second decade of the 21st century, is really so poor that we have to rip up all the things that sustain some degree of social welfare and civilised life?

POSTSCRIPT – Ed Ball’s speech to Bloomberg, setting out his case against the Coalition’s austerity plans, makes very interesting reading. I’m not sure I agree with him that Labour couldn’t have done more about the (then smallish) structural deficit whilst in office, but his other arguments stand up better. And Martin Wolf – hardly a left-winger – over at the FT continues to say somewhat similar things.

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About Colin Talbot

Professor of Government. Universities of Cambridge and Manchester, England.
This entry was posted in Whitehall. Bookmark the permalink.

One Response to Is the ‘Dash to Slash’ Really Necessary – Alternatives to Austerity

  1. Colin Talbot says:

    See this ‘So, how much debt is too much? More than the government admits’ for an excellent analysis of the debt issue
    http://www.guardian.co.uk/commentisfree/2010/sep/03/government-debt-growth-unemployment

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