So, after last week’s letter to the Sunday Times from 20 economists, supporting the Tory demand for the government to begin cutting spending this year, it’s the turn of the Keynesians to strike back.
Today’s Financial Times carries not one, but two letters from 67 economists in total, warning that early spending cuts could tip the economy back into recession and rebutting claims that the deficit is “out of control”.
The second, written by Lord Skidelsky and signed by 57 others, including Joseph Stiglitz and our economics columnist, David Blanchflower, is the more significant.
Here are the key passages:
In urging a faster pace of deficit reduction to reassure the financial markets, the signatories of the Sunday Times letter implicitly accept as binding the views of the same financial markets whose mistakes precipitated the crisis in the first place!
They seek to frighten us with the present level of the deficit but mention neither the automatic reduction that will be achieved as and when growth is resumed nor the effects of growth on investor confidence. How do the letter’s signatories imagine foreign creditors will react if implementing fierce spending cuts tips the economy back into recession? To ask — as they do — for independent appraisal of fiscal policy forecasts is sensible. But for the good of the British people — and for fiscal sustainability — the first priority must be to restore robust economic growth. The wealth of the nation lies in what its citizens can produce.
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George Osborne’s claim that the economic consensus favours the Tories has been exposed as false.
The decision to send the letter to the FT (it was originally rumoured that it would appear in this week’s Sunday Times) was a canny one. It lends the letter a far greater degree of authority; and it appears in a title that also argues against the deficit hawks. The paper’s leader today concludes:
Friday’s letters are an embarrassment for the Tories, above all, who sought to capitalise on the first letter. They must learn — soon — that their desire for simple political messages is no excuse for nuance-free policy positions.
The FT is often mistakenly assumed to be a cheerleader for the free market, but it has actually endorsed Labour at every election since 1992. And it would be foolish of the Tories to count on its support this time round.
What is surprising is that this letters war has started at a time when the differences between the parties on trimming public spending have ostensibly narrowed. David Cameron has promised that a Conservative government would avoid “swingeing” cuts and Alistair Darling has insisted (against the wishes of Ed Balls) that any windfall from lower than expected unemployment must be used to reduce the deficit, not for a pre-election giveaway.
But with the economy as fragile as it is, the Tories’ plan to begin cutting spending from this year remains deeply irresponsible. Any hope George Osborne had of presenting himself as a credible chancellor-in-waiting has evaporated.
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