The figure of £2 billion was purely for illustrative purposes; it was a simple number. I thought that people could do the arithmetic in their heads. The issue is directly whether we continue with a policy of cutting government expenditure or whether we are committed to an increase in expenditure, particularly
on infrastructure. Your Lordships will note that the noble Lord did not say that his infrastructure plans fell outside the tight vice of austerity policy. That vice must be unwound. That is what I am talking about today.
As I was saying, there is more to it than that. As the OBR has pointed out, government cuts in investment cut future output by reducing the real productive capacity of the economy. This long-term loss of output brings with it a long-term reduction in tax revenue, in addition to the medium-term effect that I have just outlined. In other words, the Government are not just failing to cut the deficit now; they are increasing deficits for years to come. By contrast, if the IMF is right, the measures proposed by my right honourable friend will be substantially self-financing in the medium term and will stimulate tax revenues in excess of spending in the longer term. This point has also been argued by the Harvard professor and former US Treasury Secretary, Larry Summers.
Before we sign up to plan B, however, another issue must be confronted. Today, any Government’s finances can be devastated by a loss of confidence in the international bond markets. The noble Lord referred to this. After a particularly violent example of sovereign bond market hysteria, James Carville, the political adviser to President Clinton, famously remarked,
“I used to think if there was reincarnation, I wanted to come back as the President or the Pope … But now I want to come back as the bond market. You can intimidate everybody”.
Well, the bond market certainly seems to have intimidated the coalition. Whenever its destructive policies are challenged, it argues that unless the vice on Britain is tightened, the financial markets will lose confidence, interest rates will rise and any prospect of recovery will be destroyed.
There are three things wrong with that argument. First, no one is suggesting a spending spree. Plan B is a cautious expansion to begin the task of building the foundations for growth. Secondly, it is austerity that is now undermining market confidence. All three of the main credit rating agencies—Standard & Poor’s, Moody’s and Fitch—have put Britain on “negative outlook”, citing concerns over the weak recovery and the public finances.
Thirdly, let us consider the experience of the United States, which lost its AAA rating last year. Would you rather have our AAA rating and zero growth or the lower US rating and 3% growth in the last quarter? I know which I would prefer.
The noble Lord, Lord Deighton, outlined in his speech a number of desirable measures that the Government can take to help to build productive capacity—the structural measures to which he devoted the majority of his speech. However, the Chancellor’s commitment to cutting demand and shrinking the state—less Bullingdon Club, more Tea Party—is eliminating any significant impact of those worthy measures. The Government’s attempt to stimulate growth has been a failure; the Government’s attempt to cut the deficit is a failure; and, if informed predictions are correct, even the Government’s attempts to preserve Britain’s AAA rating in the markets will prove to be a failure.
The coalition is now responsible for the longest slump in the British economy in the past century—longer than the great depression—yet last week George Osborne said something truly chilling. He said:
“We can either run away from these problems or we can confront them and I am determined to confront them”.
What is it in the word “failure” that George Osborne does not understand? For the sake of this country’s economy, it is time for him to run away. He is the living embodiment of plan A and must accept responsibility for its failure. Perhaps I may suggest that an excellent replacement as Chancellor would be my former pupil, the noble Lord, Lord Deighton.
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