Ahead of the spending review, some people are praising George Osborne's political courage for sticking to his original plan. God help Britain. If you have a wrong plan, the best thing to do is to abandon or modify it. Misguided courage can only magnify a disaster. If you are in doubt, just think about the first world war.
The opposition is right to demand smaller and slower cuts. However, even their arguments do not go far enough.
The first problem with the current debate is the assumption that cuts should be made according to a clear timetable. Very different timetables are proposed – the government wanting to virtually eliminate the deficit by 2015 and Labour wanting it only to be halved by 2014 – but both the government and the opposition are the same in defining their plans in terms of calendar dates.
This is economically illiterate. The appropriate level of budget deficit can only be decided according to the state of the economy. Of course, we may disagree on what the appropriate level may be for each situation, but any economically literate plan for spending cuts should specify the amounts of cut with reference to economic indicators – economic growth rate, unemployment rate, house prices, level of private sector investment, and so on – and not in terms of calendar dates, which has no economic meaning.
Second, in the current debate, there is far too little discussion on long-term growth strategy. One fundamental misdiagnosis – or perhaps a willful misrepresentation – of the current budget situation by the coalition is to argue that the deficit is mainly due to excessive welfare spending for "lifestyle" welfare recipients and greedy middle-class families.
But the bulk of the deficit is due to the fall in tax revenue and the rise in automatic welfare payments, such as unemployment benefit, due to economic downturn, rather than structural over-spending. Given this, in the medium to long run, the most effective way to reduce the deficit is to revive growth, which will increase tax revenue and reduce welfare payments, rather than cutting welfare entitlements.
The government position is that spending cuts themselves will generate growth by reviving private sector investments, especially if combined with deregulation and a nudge on the banks to lend to small businesses. But that is more wishful thinking than a credible plan to regenerate growth. When weak private sector activities are the very cause, not the result, of the deficit, cutting the deficit is not going to revive those activities.
In the British case, discussion of longer-term growth strategy has a particular urgency, as its engine of growth in the past few decades – the City – is going to slow down, with the forthcoming global tightening of financial regulation. Especially for the parts of the UK that have relied on government jobs funded by City taxes – Scotland, Wales, Northern Ireland and certain northern English regions – alternative sources of growth and jobs are even more urgently needed, as many of those jobs are going to disappear soon.
Last, but not least, there needs to be a more intelligent debate on the reform of the welfare state. Using the alleged need to dramatically cut deficits as an excuse, the coalition is embarking on a radical restructuring of the welfare state on the sly.
One may believe the welfare state should be completely restructured, but that conclusion should be reached on the basis of a thorough deliberation on underlying principles, rather than as an element of macroeconomic adjustment. For example, there should be a debate, rather than a unilateral declaration, on whether universal benefit (such as child benefit or winter fuel allowance) is unfair. There should also be a more serious discussion on why the British welfare state is so much less effective in returning unemployed workers to the labour market than are those of Scandinavian countries.
The coalition's spending cut plan not only risks killing off short-term recovery but is likely to weaken the British economy in the long run. However, the opposition parties' call for smaller and slower cuts is not enough. The debate needs to be extended to issues such as the long-term growth strategy and the redefinition of the welfare state.