Would a Cameron/Osborne Government plunge the UK back into deep recession? The nightmare scenario.

I have had a nightmare:  David Cameron and the Conservatives win a General Election next summer, despite slow but steady improvement in the UK economy; George Osborne is appointed Chancellor and slashes public spending and hikes the VAT rate up to 20%; and then it all gets a whole lot worse ….

This is not an idle fear.  The Tories’ policies have been tried before.  Governments have thought that their countries were pulling out of economic recession and have adjusted the public finances too early and too soon.  The results were dire.

Two articles in this morning’s Observer spell it out.

Nick Cohen reminds us what happened to the Roosevelt administration in 1937:

“Christina Romer, head of President Obama’s Council of Economic Advisers, has warned him not to repeat a similar failure to grasp how fragile recoveries can be by Hoover’s successor, Franklin Roosevelt. In 1937, when the American economy was at last on the mend, Roosevelt’s administration thought that it could restore order to the public finances, only to see its spending cuts and tax rises send a healthy economy back over the edge.”

Cohen goes on:

“With his sniper’s eye for an enemy’s weaknesses, Peter Mandelson noted the other day that the Tories were talking about cuts in public spending with indecent “relish”. And, indeed, many Conservative core voters are delighted by the prospect that Cameron will have to reduce radically the size of the state, rather than lead the moderate, consensual administration he thought he would be running before the crash.

If the Bank of England is right, however, and the crisis is not over, it is far from clear when Osborne can start cutting spending and raising taxes. He must want to get the pain over with early in a parliament while he can still blame Gordon Brown for the nation’s woes. As Robert Chote from the Institute for Fiscal Studies says, he must also be aware that if he does not offer a plan to cut quickly, investors may panic and push up the price of British debt.

Maybe Mervyn King will offer him a way out and tell him that quantitative easing can take the strain, and the Treasury should not be distracted from reforming the public finances. But if he doesn’t, or if he does and he’s wrong, the Cameron government could make the same mistake as the Roosevelt administration and enfeeble a recovering economy.”

Meanwhile, elsewhere in the paper, Heather Stewart reminds us of the salutory lessons from Japan in 1997 and again in 2007:

“In 1997, years after the stockmarket crash, Japan’s leaders, keen to get their public finances back under control after years of trying to prop up the economy, decided to raise taxes. Their timing could not have been worse: not only were consumers and businesses still too weak to withstand the hit, but the Asian financial crisis was about to sweep through Japan’s neighbours, causing havoc.

Again in 2001, when recovery seemed assured, the Bank of Japan tightened interest rates, the government tightened fiscal policy – and the economy slumped back into recession. It was only then, when the Federal Reserve, too, was slashing interest rates to offset the impact of the dotcom crash, that Japan finally embarked on its drastic experiment with quantitative easing, buying back bonds in a massive operation known as “Rinban”, a policy that lasted until 2006.

As is their wont, economists are divided about how effective quantitative easing was in securing Japan’s recovery. But there is more of a consensus that it was because the remedies came too late – and policymakers kept snatching away the medicine before the patient’s recovery was assured – that deflation took hold and became endemic.”

We know, of course, how experienced the Conservative team are in such matters.  After all, David Cameron was advising Norman Lamont at the time of the “Black Wednesday” debacle – so it is must be all right.  However, some nightmares come true ……

3 thoughts on “Would a Cameron/Osborne Government plunge the UK back into deep recession? The nightmare scenario.”

  1. The two policies with which Osborne is most clearly identified are an increase in the lower limit at which Death Duties (IHT) operates and Flat rate Tax, whereby everyone pays the same rate of Income Tax and there are no personal allowances

    This latter seems to have been removed from his cv on Wiki but some of us have long enough fangs that we recall Thatcher’s lies and Howe’s doubling of VAT after their 1979 election victory. (Osborne’s “Scandals” have resumed that heading on WIKI, no longer “Controversies”)

    Puts this into context, then – eh?

    http://www.telegraph.co.uk/news/newstopics/politics/5996163/Tories-study-plans-for-20-VAT.html

    Whether they use the recession and national debt as excuses for their policies to suit their interests (Multi-millionaires) and their Masters’ interests (Billionaires like Ashcroft and Laidlaw, media barons like the barclays, Desmond and Murdoch) it would be the poor what gets the blame . . .

    As their intentions come out we may find that more have the wit to favour Labour:

    The only serious caution for David Cameron comes with a question that forces voters to choose between Labour or the Conservatives: “44 per cent would still prefer a Labour government and 42 per cent a Conservative one. This is despite 72 per cent dissatisfaction with Labour.”

    wrote Tim Montgomerie on ConsHome in June 2009.

  2. Japanese save, pig Brits spend. That makes all the difference . . .

    (Encomium to the great sunday columnist Michael Frayn in the halcyon 1960s of “The Observer” for the term “Pig Brit”)

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