William Keegan: General election madhouse economics – austerity, deficits, and basket cases

As the British general election date approaches (Thursday, 7 May 2015) there is an air of desperation about the two main political parties.

The Labour Party launched its manifesto with the emphasis on deficit reduction and "fully funded" spending commitments. Ed Balls, the man who will succeed George Osborne as Chancellor of the Exchequer if Labour can form the next government, sounded as though he was trying to out-bid the Conservatives in his desperation to reduce the budget deficit.

Indeed, so convincing was his presentation that when I bumped into one of Britain's best-known comedians in our local cafe this morning, he pronounced "there is not a cigarette paper to put between the parties."

Meanwhile, with Labour edging ahead in several of the opinion polls, the desperation of the Conservatives was probably best illustrated when Defence Secretary Michael Fallon argued on 9 April that Labour could not be trusted to renew Britain's commitment to nuclear weapons.

The fact that Labour had already made such a pledge was neither here not there. Nor did Mr Fallon seem to appreciate the irony of a situation where our defence chiefs are, as it were, up in arms about the extent of recent cuts to the defence budget.

These have reached such an embarrassing level that recently the British Government had to call on French help to find out what Russian submarines were up to off the coast of Scotland.

This did not prevent our shameless Chancellor George Osborne from claiming in the Conservative press over the weekend that, should Labour win, the British economy would be "a basket case" - like France!

Defence of a basket case

Personally I think that although the French economy has its troubles, it is in far better shape than the British economy after five years of Conservative rule. There are many who would conclude that, with a balance of payments deficit of 6% of gross domestic product, and the slowest economic recovery in living memory, the Conservatives themselves can be accused of presiding over "a basket case."

Talking of defence, I think one of the clues to the way Labour presents its case is that the party feels so battered by relentless attacks from the Government that it always seems to be on the defensive.

For as the indefatigable Paul Krugman recently observed in the New York Times, Labour has been pretty feeble in countering the blatantly false Conservative charge that Labour was responsible for the financial crisis that caused the budget deficit to balloon in the first place.

But, in Labour's approach to both defence and 'the deficit', I am reminded of a recent conversation with veteran Labour Party statesman, Lord Healey, who was Chancellor way back in 1974-79, and before that, Defence Secretary in 1964-70.

"If your enemy has nuclear weapons, then you need them too," he observed. By extension I think that, although the Cold War has ended, the modern Labour Party feels that if the Conservatives support the renewal of the nuclear arsenal, then it has to as well.

Similarly, it has to sound tough on the budget deficit, even though Labour leaders know full well that the justification for the Conservatives' obsession with the deficit' - shared I fear by much of the media (including the BBC) - is highly dubious.

So, far from being an essential prelude to the present economic recovery (as the Conservatives claim) the austerity programme held the economy back and actually made it contract when it had already started to recover after the stimulus of 2009.

Moreover, despite the way they sound to my comedian friend, Labour strategists such as shadow Chancellor Ed Balls intend to adopt a crucially different approach, and borrow for sensible capital spending projects. By contrast, Chancellor Osborne wants to finance such projects by aiming at a surplus on current spending, at the expense of further damaging cuts to social spending and defence.

The latter is the economics of the madhouse!

William Keegan is a journalist, academic, and the senior economics commentator at The Observer. He has just published his latest work – 'Mr Osborne's Economic Experiment - Austerity 1945-51 and 2010' (published by Searching Finance) – which can be purchased on Amazon.