Recession? We don't know the meaning of it yet

Throughout the Tory conference, we will slowly hear the clues of the horror that will come upon us on the 20 October at the comprehensive spending review.

Currently, the vast majority of residents in the the UK know about the recession, and think we're in hard times.  This, my friends, is not hard times.  If the recession is a dinner party, we're currently handing our coats over and nibbling on the crisps and peanuts.  We haven't even got to the hor d'oeuvres, let alone the main meal.

In the years building up the crash, the government had a permanent gap between the money it was raising in tax and the money it was spending, called the structural debt.  This was going to have get sorted at some point, it was just a shame that world events got in the way.  Ideally, the government should have stopped dipping into the growth so that public spending which slowly and without pain shrink thereby lessening the gap. 

When the world wide credit crunch occurred, it meant the UK economy contracted steeply.  The government couldn't take any more money through tax, and welfare spending shot up.

Now, I know some of my dear Tory friends will be jumping up and down pointing and shouting "It's all your fault!".  I think there is an element of truth in that.  The Labour government at the time should have put the brakes on but didn't do it in time.  However, let's not forget that the biggest driver was the world credit crunch.  Without it, we would be fine.  Even if the government had put the brakes on, we'd still be in the mess, maybe just not as deep.

The current government (as would Labour if it was in power) has to cut spending to close this structural debt.  The philosophical question is how and by how much.

Cuts are needed, and are needed now.  We can't hide from that, and it's no point in saying that there shouldn't be any cuts at all.  The cost of administering the welfare state is very costly, and let's face it, we're getting older.  When William Beveridge bought about the state pension for men to retire at 65, the male life expectancy was 64.  Beveridge actually set the retirement age above the average life expectancy.  This meant in reality people only had a few years of retirement before they popped it, if at all.  Today, life expectancy for a man is 77, and that's increasing (perhaps an argument to up the age of retirement to 75...).

The coalition government is looking at biblical cuts.  It announced cuts of  25% across all departments (except health and overseas aid) with a worst case level of 40% cuts.  These are huge. Deep. Life threatening.  In Ireland, where they are in front of the UK with their cuts, all public sector employees took a 20% pay cut.

But this is where my belief in Keynesian economics kicks in.  Such cuts will only produce severely high unemployment across both the public and private sectors, and may cause a double dip; where businesses went through the mangle and shed jobs, and are only now starting to come through the other side, may well end up going to the wall.  The coalition government are in danger of concentrating so much on cuts, that there won't be any stimulus.  John Lanchester points out that in June the G20 made a commitment that they they will all halve their deficits by 2012 and to stabilise debt by 2016.  If this is the case, who will be buying?  Where will the growth come from?  The whole world will be belt tightening!  the aim is for it to be a production-led recovery, not like the consumer-led boom we've been through, but there won't be any country buying the products.

Rather than death by a thousands cuts, how about a bit of Keynesism, where we stimulate our economy ourselves?  What do we have to lose except growth?

This post is heavily borrowed from an article in the Guardian Weekend magazine 2 October 2010.