Liberal Democrats and Social Democrats have a very wide range of opinions, including economics. However, despite our differences, it’s possible to discuss them in a good-natured, honest way, without polemic.
The time to reduce the deficit has been a matter of huge controversy over the last six years. Paul Krugman is, perhaps, the best known advocate of continuing stimulus. In 2012, he attacked the UK deficit reduction programme as ‘deeply destructive’. He said, “Give me a stronger economy and I’ll turn into a fiscal hawk. But not now”.
The deficit reduction between 2010 and 2012 was certainly controversial. Some Keynsians believed the UK had no choice, because its structural deficit was so enormous, others disagreed.
However, from Spring 2013, the UK has now grown at over 2% for 10 consecutive quarters. Growth prediction is an uncertain science, but the OBR’s best estimate last November was that this will continue.
Two per cent is close to our historic growth rate: the 30 year average from 1980-2010 was 2.19%.
If we had a balanced budget, I could understand the argument for more stimulus. But we still have a substantial structural deficit, and therefore we are already, in effect, running a substantial stimulus.
There are still high levels of youth unemployment. Some think this means we have room to grow, that the UK economy is many years from the next recession, and we should therefore continue with the stimulus. But is this true? Remember, there was still substantial youth unemployment just prior to the great recession.
What if we hit another recession, with UK government debt having already leapt from around 40% to 80%. How would the markets react if we needed another period of stimulus? Would they lend us the money we needed?
Some believe high debt is not a worry, because higher government debt just leads to lower private debt, so its net effect on total UK finances is neutral. I fear that’s not true.
I fear that a continued government deficit will suck in yet more imports, and increase our trade deficit. I am very concerned that we do not reach a situation where the only way to recover is severe protracted austerity, of a kind that would make the last five years look like a golden age. I don’t want us to risk that.
When do you think is the right time to reduce the deficit?
* George Kendall is vice-chair of the Social Democrat Group, which was formed to celebrate and develop our social democrat heritage, and to reach out to social democrats beyond the party. He writes in a personal capacity.