Pain But No Gain

Today over 250,000 protesters descended on London. Their aim was to vent their anger at the Government's programme of dramatic spending cuts. Workers from all the main trade unions, students, and supporters came together to march against the coalition's plan to eliminate the entire structural deficit in just four years.

For some the grievances expressed today will be seen as the manifestation of an unreasonable sense of entitlement that has developed in the last few years. Public sector workers, they would say, must be turfed out as part of a fundamental economic re-structuring after years of dependence on the state. Many pro-cuts figures also reach for the statistics for how much the government spends on servicing debt interest in order to justify the government's cuts agenda.

Observing the protest at close quarters, it was clear to me that some of the marchers were in absolute denial about the need to reduce the fiscal deficit. Some people had banners calling for there to be no cuts at all. Others tried to explain their position by highlighting the amount spent on trident and the sums lost through tax avoidance. I would say, however, that the majority of people in attendance accepted the need for spending reductions. Their criticism would be that the coalition are going about it too far and too fast.

This is a position that has been advocated by the last two Nobel prize winners for economics. Leading economists on both sides of the Atlantic have argued that cutting back state support while the recovery remains fragile risks plunging us back into recession. The basic premise is that making more people unemployed through public sector redundancies will dampen demand in the economy. This will make it more difficult for firms to grow and it will harm business confidence. Those people who lose their job in the public sector are unlikely to be absorbed by the private sector given the perilous state of the economy.

It is in this context that the Chancellor produced his 'budget for growth' on Wednesday. The budget statement began with Mr Osborne downgrading his growth forecasts, blaming it largely on last year's snow and global instability. Afterwards, he pledged to cut corporation tax and tax on fuel (although this was clearly a political red herring as he increased VAT on fuel only a matter of months ago).

Until the recovery is in full-swing, these measures will be like moving deckchairs on the Titanic as long as they are accompanied by the government's cuts programme. I have never heard a convincing argument as to why the entire deficit has to be eliminated in four years. Why not 5? Or 6? Or 10? The markets will back a plan they view to be credible. This does not mean the deficit reduction plan has to be the most aggressive one available.

Surely the best plan is one that commits to deficit reduction but recognises the need for basic economic stability. The goal must be to put the economy back into a position where it can support people who lose their jobs in the public sector. Putting more people on the dole when the recovery is fragile just appears reckless to me. It seems like ideological nonsense spouted by a government that is obsessed with re-balancing the economy away from reliance on the state, whatever the consequences.

I hope that Mr Osborne listens to the concerns of ordinary people (and it was, by and large, ordinary people: families and all generations) put forward today about the dangers of his policy. Failing that, I hope he listens to the Nobel laureates and leading economists who have warned about the need for growth before there can be cuts. If he continues on his current course he may find that his obsession with deficit reduction leads to years of financial stagnation.