Friday, December 03, 2010

Why Deborah Orr is Wrong

Making some cuts in national spending is necessary at present because the bond markets, which lend money to countries, tend to see nations unwilling to stop piling up ever larger structural deficits as larger credit risks (because they are), and hike interest rates on their lending accordingly. This is what is actually happening. It is the situation we are in, like it or not. No metaphors are needed to explain it.

Except it isn't the situation we are in, and hasn't been for years. The interest rate the British government has had to pay on its debt has been at record low levels[1] since the financial crisis. This is because investors are more concerned about lacklustre economic growth than they are about the solvency of the British government, which is why they are keen to purchase government debt.

Fiscal discipline really is necessary, unless a nation chooses to default

Putting aside how ridiculous this sounds (having defaulted, a country would presumably find 'fiscal discipline' forced upon them, because nobody would lend to them), it is a perfect example of the tendency Chris Dillow identifies in right-wing polemic: tell a small truth and use that truth to obscure a bigger, and different, truth.

Here the small truth is that fiscal discipline is indeed necessary. But the larger truth is that the options aren't the binary 1) cuts or 2) default. There is spectrum between these and it may be the Coalition government is too close to the 'cuts' end of the spectrum. Perhaps by cutting government spending so aggressively the Coalition is reducing economic growth.

We'll never know, of course. But it is critical to recognise that 'the cuts' are a political choice, not a necessity.

[1]: This was the case even before the Coalition government came to power, and was the case even when the 'spendthrift' Labour government was in power.

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