Europe forces Lib Dem u-turn on cuts
The Conservatives spent the election campaign threatening £6bn of immediate spending cuts. The Liberal Democrats argued against because of the risk of returning the economy to recession. Now the Liberals’ Vince Cable is in cabinet he backs the Tory cuts. But that’s not political pragmatism it’s economic necessity: Britain’s position has changed because the world changed.
More precisely, the situation in southern Europe has changed. While Greece, Portugal, Italy and Spain were in a worse shape that Britain, the modest cuts favoured by Labour and the LibDems looked like decisive action. But now they have been forced to take draconian steps to close their budget deficits, even our £6bn looks as though we are not taking our problem seriously.
So to stay ahead of the curve, Cable, the new business secretary, has had to back the Tories’ immediate cut and will endorse even more drastic measures in June’s budget and more after that.
Compared with Italy’s public spending cuts of £20bn over two years, the UK measures are still not tough enough. When Ireland, Portugal, Spain and Greece are cutting civil servants’ pay, our freeze on state sector employment looks weak. Britain needs to act tough to show that it is not one of those basket-case economies.
And with growth revised upward for the start of 2010, Cable and the other cabinet converts can argue that the risk of the economy going back into recession is less likely.
The indicator to watch is sterling. It is falling against the dollar as investors prefer the size (and possibly the stability) of the greenback but it continued falling against the troubled euro after the UK election too. The announcement of the first £6bn of cuts gave it a boost but the pound must continue rising against the European currency to demonstrate that Britain is seen as a better Britain than the eurozone. We have to stay ahead of that international curve, however uncomfortable it is at home.
