Big march, little alternative

Over the weekend I was responding to the March For the Alternative in the media.  Looking at the footage, the one thing that really stood out for me, besides the UKUncut crowd's vandalism, were the placards saying "No Cuts".  Those placards really placed the march beyond the realistic policy debate.  The crisis in the public finances comes after a decade in which tax rates went up not down, so there is no way we can raise the money to plug the deficit without placing a completely intolerable tax burden on ordinary families.  If that deficit isn't dealt with then Britain will go the way of Greece or Portugal.  That would mean sooner or later far more drastic cuts would have to be made, when investors conclude we aren't serious about paying them back and demand much higher gilt rates or force us to seek a bailout which will come with stringent terms attached.

In response, some commentators said that I was constructing a straw man, that they didn't really want "no cuts".  They wanted somewhat less cut from spending and somewhat more slowly.  There are three problems with that.  First, if you are willing to accept substantial cuts then maybe put down the placard that says "no cuts", it might mislead people.

Second, the claim lacks credibility if the March For the Alternative doesn't actually set out any alternative but ideologically convenient fantasies.  They need to do more than pretend there is some huge pot of tax avoidance money Governments desperate for money have somehow failed to dip into all these years.  Last week Tim Worstall released a report for the IEA that showed how a lot of the UKUncut claims about tax avoidance are confused.  If the marchers really thought some level of cuts would be acceptable, they need to tell us which cuts they would accept and a clear idea of when.  Otherwise it all just sounds like a rhetorical cover for an unwillingness to countenance any cuts.

Finally, cutting spending less would be a bad idea even if they did mean it.  That would mean we would rack up more debt, and would have to pay more debt interest.  Bear in mind the overall cut in spending is less than four per cent over four years in real terms.  That isn't so dramatic and will only take us back to roughly where spending was in 2006-07.  The reason it will feel more painful than that in some areas is that we are spending the money on different things.  Partly we are sending more money abroad, in EU contributions and International Development spending.  But more than that we are paying a lot more in interest on public sector debt.  If we delay or diminish the cuts package then we'll have more debt and have to pay even more in interest.  That will make the eventual cuts sharper.

Things will be worse than that if the investors we are relying on to lend us money look at the Government backtracking and conclude that we aren't serious about living within our means.  If that happens then the interest rate will go up.  More debt multiplied by a higher interest rate would equal dramatically higher interest payments.  Again, that would mean sharper cuts when they eventually are made.  The marchers can delude themselves that they are campaigning against cuts.  They aren't.  If their campaign was successful we would have more cuts, eventually.

Higher spending would also mean lower economic growth over time.  Researchers at major international institutions and by top academics have studied the issue and found that lower spending is associated with more economic growth.  Higher spending diverts activity from the more innovative, productive private sector and brings higher taxes which means the economy grows more slowly.  We summarised the evidence in a research note recently.  There is a Keynesian argument that higher spending can be a stimulus in the short term during a recession but that is less likely to work with high and rising debt - people know they have to pay the money back sooner rather than later, so bigger deficits sap confidence - and we aren't looking at an immediate crisis and recession now.  We need policies to encourage growth over a number of years and decades to ensure we can all enjoy greater prosperity and make it easier to deal with a monumental debt we've built up.  Not more irresponsible short term fixes.  That long term growth is best delivered with lower spending.

So even if the marchers hadn't been marching under a banner of "no cuts" - and had instead gone with "cut less, later" - they would still have been wrong.

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