You have to be one of Vince Cable's 'austerity jihadists' to believe you can cut your way out of a slump
Vince Cable is shocked – shocked! – to find that he's been sharing a coalition with Tories waging an "ideological jihad" on public services. As if to back him up, Liam Fox yesterday obligingly decried Tony Blair's "great socialist coup", and called for a £345bn cut in public spending, as well as a complete suspension of capital gains tax (this last measure doesn't actually feature in General Pinochet's Little Book of Counter-Revolution – but from tiny acorns and all that).
Fox fits snugly into his former cabinet colleague's pigeonhole. Yet if the business secretary really is on the hunt for austerity jihadists in the government, he'd better pack a giant butterfly net. If one definition of an ideologue is one who clings on to a strategy long after it's been proven to be a failure, then on deficit reduction David Cameron is as swivel-eyed as they come. Last week, the prime minister claimed "signs that our plan is beginning to work", but next Wednesday will see George Osborne deliver yet another budget in which growth forecasts are lowered, borrowing projections raised and even more spending cuts laid out.
This will be completely in line with every other budget and mini-budget the chancellor has delivered since he first laid out Plan A. To revisit those debut budget predictions from June 2010 is as tantalising as a glimpse of heaven to a fallen sinner. Back then, Whitehall assumed that Britain would now be amid a roaring recovery, with GDP growing 2.8% in 2012 and 2.9% this year. Instead, national income shrank in the last three months of last year and we will be lucky to see a 1% increase this year. Back then, it was assumed that unemployment would now be drifting downwards, businesses would be investing like billy-o, while public debt would be about to peak before heading south and the government would be on its way to the polls in 2015, the work of fiscal consolidation done.
Clearly, none of those things are going to happen, which is partly why Tory backbenchers are now so restive. But you would have to be one of the austerity jihadists to believe that you could cut your way out of a slump. The entire modern history of expansionary fiscal contraction, as coalition ministers used to call it, is that it almost never works.
Instead, severe austerity tends to turn recessions into depressions, consign millions to the dole or under-employment and lead to frightening political turbulence.
The most famous episode of austerity was during the interwar years, as Germany, Britain, France and Japan all fought to stay on the Gold Standard even amid the Great Depression. The deflationary impact of keeping their currencies pegged to gold, along with the austerity policies they followed to do so, was disastrous.
In Britain, unemployment jumped from 10.4% in 1929 to 22.1% by early 1932, even while government debt surged. In Germany, the Social Democrats stupidly clung to the orthodoxy of austerity, pushing joblessness up to to 30% by 1932, and opening the door to the Nazis.
In Japan, the Showa Depression saw household incomes more than halve within two years between 1929 and 1931. Tokyo cut spending by nearly 20%, with the military bearing the brunt of the privations. The result was a wave of assasinations of government ministers and bankers and attempted coups. As the political scientist Mark Blyth says in his new book, Austerity: "Austerity didn't just fail – it helped blow up the world. That's the definition of a very dangerous idea." And yet when Europe's crisis began in earnest in 2009, rightwing politicians across the continent adopted the line that the best governments could do was cut spending to encourage the private sector to spend. Two of the leading proponents of the argument, economists Alberto Alesina and Silvia Ardagna were invited to present their ideas to European economy and finance ministers.
Yet as Blyth points out, their counter-examples of successful austerity were nothing of the kind. Ireland's cuts from 1987-9? The economy piggy-backed on the Lawson boom in Britain and a global upswing. As for Australia, Alesina and Ardagna mysteriously ended their happy story just before the worst recession in its postwar history. Even now, austerity merchants scratch around for poster children. There's Latvia, whose cuts over the past few years have been described by IMF boss Christine Lagarde as "a success story … an inspiration for European leaders grappling with the euro crisis". Yet around one in 10 of the labour force have emigrated, a further 16% are unemployed and, on IMF estimates, the country will not get back to its pre-crisis trajectory for another decade.
When austerity fails to deliver economic recovery. its proponents fall back on exactly the kind of naked ideology attacked by Cable. Last week, I attended a meeting of Syriza Cambridge and heard the party's central committee member Stathis Kouvelakis describe how Greeks had been forced to accept the most painful austerity programme in recent European history. The parallels with Britain were striking. Where Athens lost its sovereignty to the IMF and Europe, the coalition claims it must placate financial markets. Where ordinary Greeks were branded as lazy and cosseted, Osborne and Iain Duncan Smith want to end the "culture of welfare dependency". And where in Greece, historic cuts were rolled out in the name of economic modernisation, here Cameron wants to whip us into a "global race".
If Cable thinks he has to fend off a few austerity jihadists, he should think again; he's in a government full of them.
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