When an economy is growing to trend with a low level of unemployment, "crowding out” applies, and the budget ought to be balanced at modest level of taxes and spending. But when it has large unemployed resources, the Keynesian theory is best, and the government should not be ashamed of running a deficit. A
properly Keynesian opposition would say that the budget balance should be dictated by economic circumstances, not by some arbitrary timetable: who knows what the situation will be in two, three, four years’ time?
I understand the political problem, but I can't help but feel that Ed Miliband has missed a trick by not appointing either Yvette Cooper or Ed Balls to the Shadow Chancellor's post. Balls in particular has demonstrated a real hunger to get at the Tories and he certainly has the intellectual economic firepower to wither Osborne as the economy teeters on the brink of recession. Alan Johnson has many sterling qualities and his life story is a great narrative to hold against that of the privileged Osborne, but I would feel happier knowing that an economist was at the helm of policy. However, Ed Miliband is a serious economist in his own right and Balls and Cooper aren't far away to support him, so the firepower behind Johnson is quite significant. Mehdi Hasan makes a proposal for the new shadow Chancellor - shift the balance of deficit repayment to 50/50 tax and cut, even more credible when you realise that the savings so far proposed by the government aren't likely to bear any fruit until the 2012/13 tax year at the earliest, whereas tax increases could be in place much sooner, targetting those who are still doing rather well out of the economy, the bankers.
This is the message Labour must promote: cutting spending is not the same as cutting the deficit. The new shadow chancellor, Alan Johnson, has joked that he plans to buy an economics primer to prepare for his new post. I have a better suggestion for him: reread Balls's speech. Or alternatively go online and download a research paper entitled "The Economic Consequences of Mr Osborne", co-authored by Victoria Chick, emeritus professor of economics at University College London, and Ann Pettifor, one of the few British economists who can credibly claim to have predicted the crash. Having studied the data from 1918 to 2009, they conclude: "The empirical evidence runs exactly counter to conventional thinking. Fiscal consolidations have not improved the public finances . . . Consolidation increases, rather than reduces, the level of public debt as a share of GDP and is, in general, associated with adverse macroeconomic conditions."Hasan points out that there is a precedent for a 50/50 share and it would be hard for the Tories to deny
In his Budget statement, in November 1994, the then Conservative chancellor and current Justice Secretary, Kenneth Clarke, told MPs that a 50:50 ratio would "meet the objective of healthy public finances". Norman Lamont, Clarke's predecessor in No 11, also matched spending cuts with tax rises, as did Sweden (53:47) and, to a lesser extent, Canada (60:40) in the 1990s - two countries routinely held up as models of fiscal consolidation by deficit hawks.The main push now is to have clear policies in place for the spending review next week, explaining where we would follow and where we would differ. The difference is the key, because if the economy tanks again next year, then if we are just pale shadows of the Tories, we cannot claim to have offered a real alternative - even if the public seem to have forgotten that the Tories would have adhered to our spending plans up to 2008. This would put clear water between us and the coalition, allowing us to argue that we expect the banks to bear their share of the costs of the deficit and would have broad international support into the bargain.
So come on Ed, be bold. Be brave.