A question for chancellor Osborne

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FT.com / Columnists / Martin Wolf - A question for chancellor Osborne.

It's Martin Wolf time again.

I don't agree with him on the Office of Budget responsibility or cutting the number of budgets, but the rest is so spot on I'll sweep those aside.

As he says:

Your government is preparing the ground for a large, sustained and pre-programmed reduction in the structural fiscal deficit. But if this tightening is not to generate an even more prolonged period of economic weakness, and so a bigger cyclical fiscal deficit, there must be strongly offsetting reductions in the surpluses of the household, corporate or foreign sectors. The first is surely undesirable: the UK wants higher household savings, not less. The second is indeed desirable, since corporations ran a financial surplus, of 8 per cent of gross domestic product, in 2009. But considerably higher corporate investment is unlikely if the economy itself now weakens. Last but not least, the crisis in the eurozone, the UK’s most important trading partner, not to mention its enthusiastic embrace of the fiscal hair shirt, makes escape via far higher net exports unlikely.

With luck, I will be proved too pessimistic. But what are you going to do if I am not? Are you going to stand by if the economy goes into a steep decline? Have you discussed this possibility with Mervyn King, the governor of the Bank of England? In such circumstances, the most effective instrument might be central bank financing of additional public spending. But your commitment to pre-programmed spending cuts would seem to rule this out. The alternative might be a temporary reduction in taxes, of the kind you condemned under the previous government. In any case, the UK should have a plan for growth of nominal demand at a rate of 6 per cent and preferably more, for some years. Who is to take responsibility for this – and how?

However carefully you carry out your public relations, the cuts you intend to impose will be viewed as punishment of the innocent for the sins not just of the guilty, but of the rescued and now bonus-receiving guilty. You can answer that cuts are necessary because the economy is durably smaller than hoped and so pain must now be borne by public spending, the part of the economy that has not yet adjusted to reality. But if, at the same time, you made the economy weaker, so throwing away the advantage of policy autonomy, your decisions would be unpardonable – and unpardoned.

I have no question that the structural deficit must be eliminated. But I will judge your emergency Budget by whether it also contains a credible plan B for demand. If it is believable that monetary policy will work, on its own, even in today’s circumstances, well and good. But I, for one, doubt it. So remember this: the imposition of futile misery is not an act of wise policy, but rather a sign of folly.

I hope they'll forgive such a lengthy quiote on the grounds of genuine public interest (and there's more - go read the rest - please).

The fact is this: Wolf is saying what is obviously true to all but the banking class who (like Osborne) saw no sign of a recession coming and were demanding ever greater deregulation even as it swept over us.

We are being gripped by another economic madness of which the outcome - a slump -is as inevitable as a bank crash as a result of over extended lending based on inflated property prices was.

And I really would rather it did not happen. Even if I - and a few others - will once again have the advantage of saying "I told you so" when it does.