Vince Cable writes an interesting piece in today's Evening Standard about the spending cuts debate, though he misses out one crucial element in the discussion.
Cable makes the good point, which is being forgotten, that:
Cutting public spending before we are safely out of recession risks pushing us back into recession. Equally, the apocalyptic cries of “national bankruptcy” are unhelpful scaremongering. In fact, general debt levels in relation to GDP are modest by historical and relative standards and borrowing costs are low — below two per cent in real terms.
He is right, and this is where the Tories' economic thinking is muddled and wrong.
However, nowhere in his article does Vince Cable mention the bond market. It is not the case that the UK will not be able to fund its debt, but I suspect the Treasury is worried that if markets believe borrowing is not under control (in some way), the cost of borrowing could rise.
What would have happened if the Budget had predicted borrowing this year and next as being, say, £185bn rather than £175bn? Probably not a lot different as long as there was a plan of some sort to reduce it. But I suspect Alistair Darling believed £175bn, which allowed for necessary stimulus measures, was about the right level. There is room for debate about how we go about balancing the budget by 2017/18 - eg which years have more reductions in spending.
Keynes was probably right that if you look after growth, the budget will ultimately look after itself. There are two ways to reduce a structural budget. One is to cut back aggressively; the other is to focus on building up the productive potential of the economy. The Budget, being in fact prudent, focused on the former. But we need to discuss measures to boost investment. Moreover, unemployment has not gone away and is still rising.