Delaying the pain of cuts will not work
THE support of 35 leading business figures for the Government’s debt-reduction strategy – signalled in a letter in a national newspaper yesterday – is, in itself, of some significance.
But the real interest in the list of those who signed the letter, carried in the Daily Telegraph, lies not so much in their number as in the mix of sectors they represent. Although the signatories emphasised that they were each writing in an individual capacity, rather than on behalf of their companies, it is of note that so many of them head consumer-facing businesses.
They, above all, might be expected to be sceptical over plans for spending cuts which will, inevitably, have an adverse effect on public sector employment and put household budgets in general under further pressure. The fact that senior figures from businesses such as Marks & Spencer, Asda, Diageo, Next, Kingfisher and Whitbread support the Government’s approach underlines the urgency of the need to tackle the deficit decisively.
In contrast, comments yesterday by Shadow Chancellor Alan Johnson indicate that, despite its change of leadership, the Labour party has learned little from its defeat at the General Election when its strategy for a longer period of economic adjustment was rejected by the electorate.
Mr Johnson proposed cutting the rate of deficit reduction by half and imposing new levies on the banking sector to pay for increased investment in infrastructure.
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The tax-and-spend nature of the second of these proposals is hardly surprising on one level, coming from Labour, but given the party’s criticism of the banks for failing to lend more to businesses one might have thought that even an economics beginner like Mr Johnson would have recognised the potentially damaging impact of such a policy.
If the banks are not lending enough now, how is taxing them further – in addition to the regulatory requirement for them to carry more capital in future – supposed to help?
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However, the real danger lies in the first element of Mr Johnson’s alternative strategy.
As yesterday’s letter from the 35 business leaders pointed out, reducing the deficit more slowly would mean more borrowing and higher interest payments. This in itself would make the overall cost of cutting the deficit far greater and so require deeper cuts and/or further tax increases to pay for it.
But even this might not be the worst of it. Without a credible plan for cutting the deficit within a reasonable time-scale, the UK’s credit rating could come under pressure, with the result of higher interest rates all round.
Far from reducing the pain, Labour’s alternative strategy would, in the long run, serve only to add to it.