Labour is yet to lay out its detailed economic policy. Will Straw from Left Foot Forward lays out the path he thinks the opposition should follow in reaction to the spending review cuts
George Osborne has put all his chips on black. In the highest stakes game in town, the chancellor has bet the country's finances - the coalition's chances of success, and his own political future - on a cut-at-all-costs policy aimed at returning the budget to balance.
The gamble he is taking is that the unprecedented cuts will pave the way for a private sector recovery. As David Cameron said: "Dealing with this defi cit is not an alternative to economic growth - the two go hand-in-hand." The lessons of the 1930s have been forgotten.
This is not to argue that reducing the deficit isn't necessary. It is, and should be, a major goal of economic policy in the coming years. But reducing the defi cit and raising growth does not call for a chopper chancellor.
The household metaphor - beloved of Margaret Thatcher, David Cameron and Nick Clegg to describe the country's borrowing - has been dismissed as "totally misleading" by The Times' Anatole Kaletsky and as "simplistic nonsense" by Matthew Engel. A better metaphor is that of a captain steering a cruise liner into a narrow harbour. On one side loom capital markets so anxious for cuts that they are threatening to push up the cost of debt interest payments and sink the government's cherished AAA credit rating. But on the other, a lighthouse warns that cutting too quickly will push up unemployment costs, lower tax receipts and unbalance the keel of recovery. The consequence - as seen in Ireland - is a rising deficit despite the cuts.
George Osborne's vessel is so fixated on the first set of rocks that he risks becoming scuppered by the second. The route to safe harbour is through the middle - a process of iterative adjustment and caution, wary of both risks. It requires clever hedging rather than arisky roll of the dice.
A second instance of the coalition taking a gamble is in the composition of the deficit reduction. Both tax cuts and spending increases have what economists call a multiplier effect - money handed over bythe taxman or the Treasury will, in turn, be spent on the goods and services that contribute to GDP.
But the independent Offi ce for Budget Responsibility (OBR) is quite clear in the Budget Red Book that spending has a greater multiplier than cutting taxes. Indeed while a cut in tax delivers 30p for every £1 spent, an extra £1 of departmental spending provides 60p for the economy, and investment in infrastructure adds a full £1.
The same is true in reverse. In either raising taxes or cutting spending, the government is doing economic damage. But because of the higher multiplier, cuts are far worse. And since the defi cit is measured as a percentage of GDP, the more that growth is dampened by cuts, the more time it will take for the defi cit to fall.
This is not an argument against each and every cut made by the government. Departments will have to tighten their belts through pay freezes, efficiencies and the end of some programmes. But there is a simple pathway to reducing the cuts from the 20 per cent planned by George Osborne to under 10 per cent.
First, no domestic department should be ringfenced. If we're all in this together, there can be no justificationfor excluding the Department of Health. The health budget makes up close to a third of total departmental expenditure, so increasing its budget in real terms, as Cameron promises, means greater cuts elsewhere.
Second, taxation must make up a greater component of the deficit reduction. The coalition's £13bn rise in VAT was largely offset by a series of expensive and ideological tax cuts. Worse, the OBR estimates that taxation will only contribute £3bn to defi cit reduction once the cuts start to affect growth.
If, instead of cutting taxes, the coalition had taken the International Monetary Fund's advice and trebled its bank levy while extending the temporary £3.5bn tax on bankers' bonuses, it could have reduced the level of spending cuts that will mean drastic cuts to universities, the police, legal aid and environmental protection among many other areas. The Tory-led coalition has vacated the centre ground of British politics by basing its economic strategy on a dogmatic hunch. For the left, opposing all cuts is counterproductive. But by setting out a responsible middle path, progressives in Britain can rally public opinion against the risk and iniquity of George Osborne's gamble.
Will Straw is editor of the Left Foot Forward blog, http://www.leftfootforward.org/
This article was first published in Total Politics magazine.