Belfast Telegraph

David Prosser: It's the debt extremists we should fear

This is becoming rather tiresome. It may make for good knockabout politics, but George Osborne cannot simply go on dismissing all critics of the Coalition Government's cuts as "deficit deniers", as he did yesterday.

That phrase was particularly unfortunate given its connotations, but the underlying issue is the growing concern about the programme upon which the Chancellor has embarked and the fact that Mr Osborne dismisses it so cheaply.

No one – and certainly not Alistair Darling, the former Chancellor – believes Britain's record deficit can simply be ignored. In fact, Mr Darling's pre-election proposals for substantial cuts also represented a gamble that the economy would be able to cope with an unprecedented withdrawal of public spending. But he was not planning a wager on the scale Mr Osborne is making.

The Chancellor's now familiar argument is that not to do so would be an even bigger gamble, because it would risk the bond markets withdrawing their support for British government debt – that we would be in danger of heading into Greek territory, in other words.

The problems with this reasoning are twofold. First, by insisting that not cutting so dramatically would be the greater risk, Mr Osborne tacitly acknowledges that his proposals also carry dangers.

And though he argued yesterday that he would not put growth at risk with cuts, the Office for Budget Responsibility has already lowered its growth forecasts once, following the Budget.

The second flaw in Mr Osborne's argument is that Britain is nowhere near as dependent on the bond market as our collective terror of the credit ratings agencies would seem to suggest. Even leaving aside the fact that our total indebtedness is well below many of our rivals, for now at least, the money we owe is not repayable for an extended period. Our gilts must be rolled over, on average, 14 years from today. The comparable figure for the US, for example, is around nine years. Moreover, while more than two-thirds of Greek debt is held by international investors, the comparable figure for Britain is less than one-third.

In other words, Britain has plenty of time to put its finances in order and more forgiving lenders with which to negotiate.

None of which is to say that the deficit should be left to spiral out of control – just that the obsession with getting on top of it so quickly is dangerous. The famous example of the early 1980s, when more than 360 economists signed a public letter warning the then Chancellor, Geoffrey Howe, against the sort of action on which Mr Osborne is now embarking – only to see their predictions of doom confounded by economic recovery – is a false comparison. A plunge in the value of sterling squared the circle then, but will not do so this time around.

This is not an argument about whether or not to cut, as it suits Mr Osborne and, to be fair, many of his critics, to pretend, but a debate about how far the cuts should go and how soon. The worry for the British economy is that the current Chancellor is at one extreme of that debate.

Belfast Telegraph

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