George Osborne’s Autumn Statement has made clear as crystal that the coalition government’s economic strategy has been reduced to deficit reduction in an effort to defend Britain’s AAA credit rating.
This is hopeless. Even if Britain’s economic performance is no worse than projections there is no possibility that the coalition government will be able to sustain this level of deficit reduction for the seven years that is now planned. As has been pointed out by numerous commentators there is simply no precedent in modern British history for this. In fact it was already clear from the comments of Danny Alexander the Chief Secretary to the Treasury on Newsnight that the deficit announcement in the Autumn Statement is no more than an aspiration since the details of many of the actual spending cuts have not yet been agreed. There is of course no realistic possibility that many of these spending cuts ever will be agreed much less implemented on anything like the scale that would be needed to meet the target.
This means that unless there is a major change in economic conditions the coalition government is certain to miss its deficit reduction target By constantly harping on the need to meet this target the coalition government has however boxed itself into a corner. Its constant refrain that unless the target is met Britain’s credibility in the financial markets will be lost means that when the target is missed Britain’s credibility may indeed be lost. If so a credit downgrade is inevitable. Whether this will have quite the catastrophic consequences some predict is of course another matter. In the meantime and until this happens the attempt to meet the target will however ensure that any growth in the economy is choked off thereby deepening the existing recession.
This all reminds me very much of 1992 when a previous Conservative government pinned its credibility to an unachievable target, in that case maintaining sterling’s value within the European Exchange Rate Mechanism, even though the price was a severe economic recession. That government’s reputation for economic competence never recovered when the target was missed. One wonders what will be the case this time.