Queen's Speech

Lord Skidelsky Excerpts

Wednesday 2nd June 2010 Lords Chamber

[Lord Skidelsky]

My Lords, I congratulate the Minister, the noble Baroness, Lady Wilcox, on her appointment to her important new responsibilities. I regret only having to turn my head to the left rather than the right to get the full flavour of the masterful performances of the noble Lord, Lord Myners, that I have come to expect and which, indeed, we got today.

In the Crimean War, it is said that Lord Raglan, a veteran of the Peninsular War, announced his plan of campaign to the assembled commanders by pointing to the map and saying, “We attack the French here”, at which point an aide whispered to him, “Sir, the French are our allies”. I trust that members of the coalition will not be afflicted by a similar cognitive dissonance.

The Government have already announced £6.2 billion of cuts, and further cost-cutting is promised in the emergency Budget of 25 June. Contrary to the noble Lord, Lord Desai, I believe that these will be real cuts if growth does not take place. That is why I would not make them until we have much firmer evidence of recovery than we have at the moment.

Why this stampede to austerity? The basic reason is a visceral, if vestigial, puritanism. We feel that more spending cannot be the answer to having spent too much already. Peter Oborne summed this up well in the Daily Mail. He said:

“Borrowing to save the economy is like trying to sober up a drunk by giving him a large whisky”.

The Chancellor said much the same some six weeks after the collapse of Lehman Brothers. He said:

“Even a modest dose of Keynesian spending”,

is,

“a cruise missile aimed at the heart of the recovery”.

That was in October 2008.

I have long argued that such propositions would be true if the economy was at full capacity. The boom is the time for belt-tightening. However, these propositions are not true for today. Everyone knows that output and employment are severely depressed. The OECD has calculated that the UK’s output gap is 5 per cent. Does the noble Lord, Lord Henley, agree or not agree with that estimate?

In my judgment, we are experiencing a good, old-fashioned Keynesian demand-led recession, which requires a good, old-fashioned Keynesian response. As Nobel laureate Paul Krugman writes:

“Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea. Not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts”.

By what mechanism do the Government believe that cutting the deficit will promote recovery? The usual argument is that it will restore business confidence. Surely the best way to do that and to reduce the deficit is to increase total spending from the low level to which it has fallen. The projected deficit has already shrunk from £176 billion to £156 billion without any change of policy. It will continue decreasing gradually as the economy recovers, unemployment shrinks and revenues grow.

The way in which the stampede for austerity has built up is frightening. I have yet to find a single solid reason for cutting the deficit now, especially in view of the disaster threatening to overwhelm the eurozone. People talk about the need to pay attention to the psychology of the markets. However, no one who has made any money on the market believes for a moment that financial markets are capable of judging risk accurately. As Warren Buffett said:

“A pack of lemmings looks like a group of rugged individualists compared with Wall Street when it gets a concept in its teeth”.

That is why politicians and public officials have a particular responsibility not to try to second-guess the financial markets by threatening disaster if certain policies are not followed. They do not know what the financial markets will think and, by playing up the risk of default or inflation, they can create a dangerous self-fulfilling prophesy—exactly the type of momentum that they do not want. If the markets believe what the Chancellor has been saying for the past year or so, they might make it impossible for him to eat his own words.

It is a tragedy that the very financial system that has recently been bailed out by the taxpayer is treated as the arbiter of fiscal policy—using the very deficits and debt that they have foisted on us as the pretext for savage fiscal cuts in recession. Regrettably, I do not agree with the noble Lord, Lord Lawson, that deficit reduction should take precedence over any other policies, but I agree with a famous predecessor of his, Winston Churchill, who, as Chancellor of the Exchequer, said:

“I would rather see finance less proud and industry more content”.