Budget 2010: economy stuck in deflationary spiral

By Ann Pettifor – Posted March 24th in the Guardian Comment is free

My more or less immediate response to Alistair Darling’s final budget:

This was a politically skilful budget. Alistair Darling faced the problem of the ongoing deflation of an economy de-leveraging its debt in unseemly haste, and dragging down economic activity, prices, profits, incomes and jobs as it does so. He also had to tackle the substantial decline in full-time employment over the course of the recession, only partly offset by increases in part-time employment. Thirdly, he had to counter the threat to Britain’s long-term energy and climate security.

He needed to deal with these threats by investing in a Green New Deal – a huge package of public investment to create at least a million jobs a year and decarbonise our economy. This level of public spending would compensate for the collapse in private investment and stop the deflationary spiral.

He got off on the right foot by pointing to the £11bn fall in borrowing that is a direct result of the mini fiscal stimulus of last year. The improvement has come from tax receipts and the stimulus measures adopted, including the cut in VAT and not from employment taxes. This demonstrates that taxes are the key to the deficit, and that stimulus works in reducing it. The remainder of the £11bn improvement has come from lower-than-anticipated gilt yields. So much for the theory that cuts are needed to reassure financial markets.

With those numbers, Darling has seen off the deficit hawks in the Conservative party, the Institute of Fiscal Studies, the City and the BBC. He has been proved right: a little fiscal stimulus staved off even higher unemployment and bankruptcies and helped stabilise the economy. Above all, he has proved, unequivocally, that government spending pays for itself.

But instead of using these numbers, and this proof, as a springboard for an even greater stimulus, the chancellor came over all optimistic. He promised economic growth and began the process of fiercely turning down the public spending screw, and with it real wages.

Public sector net investment will fall from £50bn in the current year to £39.5bn in 2010/11. At a time when total investment in the economy has fallen by £46bn, and private sector investment fell again in Q4, this will serve to increase the spin on the downward deflationary spiral. Furthermore, given Britain’s balance of payments challenge, this collapse of investment will damage our ability to pay for imports, and lead to further currency crises.

To tackle the threat of energy and climate insecurity we are offered the promise of a new bank – a “green investment bank” – with taxpayers providing £1bn of equity and the City of London promising to match that sum. In other words, the City is offered a sweetener to participate in yet another subsidised bank, where it will no doubt be free to offer loans at unpayable rates of interest to budding entrepreneurs keen to manufacture wind turbines.

But Darling’s budget fails to stall the deflationary spiral. It could come back to haunt him.