Psychology is against Alistair Darling
Everyone agrees the government must return a sick economy to health. The disagreement is how quickly to do it. Too much medicine could kill the patient; too little allows the disease to fester.
The debate over the pre-budget report is actually only a rehearsal for the general election campaign, when the public will need to understand the issues and decide whether it prefers drastic action or steady convalescence.
Chancellor Alistair Darling believes that if he cuts debt too quickly and is overzealous in axing public spending he will exacerbate the problem. Bank of England governor Mervyn King and – despite inconsistencies in their argument – the Conservatives think speedy action is essential.
The problem is that debt not only fuelled the supergrowth of the pre-credit-crunch boom, it fuelled basic levels of economic activity. Cut back too rapidly and not only is the froth knocked off the economy but the underlying national income is hit too. So the chancellor thinks the way to solve the debt problem is to borrow, in the short-term at least. And as the public has become averse to borrowing, despite record low interest rates, the state must do it for them.
This debt is financing not only the banks’ rescue but bridging the budget deficit between public spending and government income.
With his Keynesian textbook, the chancellor reckons using public money to keep people in work can be self-financing because it returns tax to the exchequer (instead of paying people state aid to the unemployed) and puts cash into the private sector through the multiplier effect.
However, the counter argument is that to find this money to inject into the economy, the Treasury must either tax people, leaving them less to spend, or borrow their savings – again preventing that money from being spent privately. And such is the inefficiency of the state machine that taking money through tax and returning it through public spending works less well than leaving people to spend their own cash.
The economic argument may be with the chancellor but the psychology is against him. People may like less immediate pain but not be prepared to suffer it for longer.
They will prefer to have a short but severe downturn in their circumstances forced on them so that they can quickly move to a long slow improvement. We tend to measure out progress by asking if things are getting better, not checking whether they are back to where they used to be long ago.
The temptation for a political party facing a general election is to allow debt and public spending to continue for another year until after the poll, then to switch to the austerity that will be necessary. If we can’t trust the politicians not to do that, let’s rely on the electorate being too wise to fall for such a trick.
