What is holding Britain back from a stronger recovery is that there simply isn't enough demand in the economy
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Big businesses and investors are awash with funds – they don’t invest them because they seldom see a return. Photograph: Matt Cardy/Getty Images
David Cameron has been rightly hammered for last week's big speech on the economy, by his own Office for Budget Responsibility (OBR) for misrepresenting its position on cuts and growth and by assorted economic grown-ups for a wider misunderstanding of the damage his government's strategy is doing to Britain's fragile-to-negative recovery.
But it's worse than that. Liam Fox, one of several Tories making "look at me" noises as Cameron's government hits choppy waters (yes, we know you're there too, Theresa), made a speech too last week. It didn't get as much coverage, rightly so, though the unstoppable Andrew Sparrow provided the bullet points on his daily blog here. The full text is (oddly?) here in the New Statesman and the Guardian's summary is here.
What Fox says doesn't matter in itself. As I never tire of explaining he's damaged goods, his chance of becoming the post-Dave Tory leader are slightly less than mine, unless the party is defeated in 2015 – by no means clear – and decides to wander off into the wilderness as it did under William Hague after John Major was defeated in 1997 by the man we mustn't mention.
But Fox is a mid-Atlantic politician, in impressionable thrall to plausible US Republican ideologues (if you like that sort of thing) as well as to their Ukip fringe, the Tea Party. As it shows with every utterance the Tea Party (its foot soldiers as sincere as the average Ukip activist) is busy helping them to become unelectable to the White House, despite their strength in conservative strongholds where folk don't get out much. Just look at ex-VP nominee and bogus populist Paul Ryan's latest prescriptions for budget-balancing at the expense of the old and poor.
The not-so-fantastic Mr Fox. He says Britain spends and borrows too much. Photograph: Lewis Whyld/PA So Fox's similar sentiments matter here because a lot of people out there believe his claim that the problem is a supply-side one. Not in the sense that we need to work on our education, our productivity, our investment strategies, public and private, as well as the fiscal policies which nurture them and entrepreneurial talents that provide jobs and wealth. That is a supply-side problem we always need to address in an ever-competitive world.
No, where Liam Fox goes badly wrong is where he thinks we need to freeze public spending for three or even five years to help cut borrowing and thereby free up scope for tax cuts. Our problem, he says, is that we are over-taxed, over-regulated and that we spend and borrow too much. That's true for some people, who are over-taxed (many of them very poor) or over-borrow (those credit cards, eh!), as it is for some firms – small firms, those most likely to create new jobs and wealth. They do carry a big burden of tax and paperwork.
But overall, it's not true at all. Big firms and investors are awash with funds – they don't invest them because they don't see a return. What is holding us back from a stronger recovery is that there isn't enough demand in the economy. Companies and individuals are paying down debt – de-leveraging is the fancy word – yet the government, which has much deeper pockets, is doing the same instead of leaning against the bust (just as Labour failed to lean against the boom).
Hence the depth of austerity, hence the failure of the economy to regain what it lost when the banking system tanked in 2008-9, hence the fear of triple-dip recession that hovers.
Cameron and Osborne, whose milder version of Foxism was reflected in the PM's speech – and will be again in the budget – mock the "money tree" view that paradoxically suggests we need to borrow more to end up borrowing less. But as that Olympian pundit the FT's Martin Wolf pointed out again this week (subscription), that is indeed the case, even if Ed Balls says it's true.
It's not that Fox is entirely wrong. There is a case for not ring-fencing certain types of spending, including overseas aid, the NHS and defence equipment, because such exceptions distort spending and distort cuts elsewhere in the system. There a case too for cutting the perks of well-off pensioners – bus passes and winter fuel money – which I have made before on behalf of such people, including myself.
But the assertion that cutting progressive taxes – abolishing capital gains tax for five years as well – and placing most of the consequent burden on the poorest (who at least spend what they get and thereby put demand into the high street) is both immoral and economically wrong. As the OBR reminded Cameron it has always warned that tax increases and spending cuts "reduce economic growth in the short term".
David Cameron and George Osborne reject claims that Britain must borrow more to eventually borrow less. Photograph: Ray Tang/Rex Features Analysts whose offices are not just down the corridor from the chancellor's (as the OBR is) are more blunt. The IFS says that fiscal tightening – higher tax, less spending – will raise the debt ratio as revenues collapse in the wake of the fall in output while spending to fill the gap (unemployment pay anyone?) rises. It's what Treasury types call "the jaws of death" – falling tax income and rising expenditure.
Officials are rightly keen to close that gap. But when demand is low and interest rates are exceptionally low, we could spend more money on worthwhile projects – the usual infrastructure stuff, Vince Cable's ideas about investment strategies for productive enterprise, familiar ideas with which the Treasury flirts half-heartedly.
Britain has a more disciplined budget mechanism than the US where the Bush Republicans promised to cut taxes and spending but mostly cut taxes: a supply side remedy that fails and is slowly crippling the federal system. It needn't be a shambles here. We control our own currency – and borrow in it, a priceless asset which our eurozone neighbours have forgone.
UK austerity might be a more plausible option if everyone else in Europe – and increasingly beyond it – were not playing the same game. Via export drives or currency devaluation we now risk the beggar-my-neighbour tactics which bedevilled the recovery in the 30s. Yet the world is awash with capital – try this (subscription) analysis in the FT, which paints a startling contrast between struggling real economies and a mountain of money searching for safe and sensible places to park it.
It cites analysis from Bain & Co, the firm co-founded by Paul Ryan's running mate, Mitt Romney (it was never clear who was boss), predicting that by 2020 there will be $900tn-worth of savings out there compared with a global GDP worth a mere $90tn. Hence the report's title, A World Awash in Money. It needs boldness and imagination, not the budget's expected caution, to hook the money up to the need.
