There’s disagreement (recall those economists’ letters) about which is the bigger economic threat: cutting public spending and the deficit so fast that a still-feeble private sector can’t take up the slack and we fall back into recession; or letting borrowing stay so high for so long that the markets take fright, the government’s credit rating is damaged and public-debt servicing becomes much more expensive.
Both sides of the debate claim that their approach can achieve the aims of the other side: the cutters say that a lower deficit will improve business confidence and boost growth; the borrowers say that public spending will support a stronger recovery, which will lower the deficit.
FWIW my own view, at least at this stage, leans towards the borrowers:
- Private-sector weakness is likely to persist due to tight credit availability – the crunch hasn’t gone away, you know.
- Recessions caused by financial crises tend to have weaker recoveries, as do global recessions.
- The flipside of our relatively resilient labour market is the risk of a jobless recovery, at least for a while.
- Gilt yields are up, but despite the end of quantitative easing, they haven’t surged, so the cost of borrowing still isn’t anything like as much as in previous decades – and we’re pretty much getting to the peak of gilt issuance now.
- UK public debt is pretty long-dated, so we’re not needing to raise as much cash on the markets to replace expiring bonds as other countries with smaller deficits.
- And by international standards, our total public debt isn’t that large.
But timing matters. Last year, as the recession was raging, only crazy people were advocating immediate deficit cuts. Assuming continued growth, the economic case for cuts will become far stronger in the next year or two.
This year, as we’re just inching into recovery, the debate is more balanced. Neither a double-dip via over-hasty cuts nor a borrowing spiral is an outrageous fear, and any sensible approach will have to take both risks into account.
But there’s a third aspect to this, beyond any of the economics: spending cuts have social consequences. Let’s not imagine that deficit reduction on the scale that the IFS describes can be done via efficiency savings. Services that people – particularly but not exclusively poorer people – rely on will suffer.
And here’s where the credit-rating agency Moody’s comes in, this week grimly warning the UK and other countries:
Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion… the severity of the crisis will force governments to make painful choices that expose weaknesses in society.
Moody’s, as you’d expect, treats massive deficit reduction as the sine qua non and everything else as an unavoidable shame that we’ll just have to get through somehow.
But is that right? It’s a political belief, not a mathematical fact, that the government’s AAA rating needs to be protected whatever the social cost, whatever the sacrifice, by fighting to the dying breath of every last teacher, nurse and constable. A credit-rating downgrade is neither necessary nor sufficient for raising the cost of borrowing.
The quality of public services should be treated as a factor – a really important factor – to be weighed alongside others (the cost of borrowing, the enfeebled private sector), not a sad but inevitable piece of collateral damage in the War on Debt. Intelligence reports suggesting that the ratings agencies possess weapons of mass destruction are deeply dodgy. And so is the argument that we have to inflict the mass destruction on ourselves to appease them.