Tory Lies and Damned Statistics

All praise to Zoe Williams

Here is the problem with the economy, and the coalition's stewardship of it, from an observer's point of view: they say "the huge burden of debt the last government left us with", and although I smell a rat, I cannot smell how large this rat is. Ed Balls or – more audibly, actually – Gordon Brown before him, can say this deficit reduction policy is lunacy, but it's hard within a context of adversarial politics to tell how much danger we're really in.

A Tory MP might say on Any Questions, "We have to do this or we'll end up like Ireland", and we might know instinctively that we're not Ireland yet not know exactly how unlike Ireland we are. It's straightforward to disagree with specific cuts – but maybe, because it's simpler, we're arguing about which tree to cut down when we should be arguing about the whole programme of deforestation.

Michael Mendelson is now an academic at the Caledon Institute of Social Policy, but his relevance for these purposes is his work in government: he was at the centre of fiscal policy during the great Canadian "bloodbath budget", the massive-scale deficit reduction undertaken by Jean Chrétien's liberal command in the mid-90s.

Canada's success was the ideal held up in Tory electioneering: it is rare to effect successful consolidation – to the extent that it's only happened six times among OECD nations since 1970, and one of those was Greece (in other words, it didn't happen but looked as if it had). Apparently Tories did solicit advice from key players of the Chrétien experiment prior to Britain's 2010 election, but only about the mechanics of deficit reduction. Nobody asked whether conditions were right. Nobody asked if it was a good idea to try this at home.

The first problem is that the UK is nothing like Canada. They succeeded because they had vigorous growth, their exports were strong (oil and manufacturing, both to the US, which was also booming) and private-sector demand for labour was outstripping the public sector cuts from the minute they started.

Mendelson explains: "You can't just choose when you're going to cut your debt, any more than you can say 'I'm going to sell my house now and get the same price as I got three years ago'. There's a market. And it's odd that the people who are the most defensive of the market don't seem to understand that fiscal management is also part of the market. You can't just decide that you're going to free up resources that are currently being used by government unless you're sure there's somebody else who's going to buy them."

To edge back a step, our deficit was nothing like Canada's either. Theirs had been rising steadily since 1974, and debt had got to 70% of GDP. Ours was 30% before the financial crash, a figure that is manageable, almost respectable. Mendelson observes: "You're an extremist country, it's odd. You don't think of yourselves that way. But you are. There is no crisis in Britain. Even if you're not a Keynesian, at the very least you'd admit that it is incredibly risky to implement a massive one- or two-year cutback in public-sector spending in the midst of what everybody recognises as the most dangerous period of economic turbulence since the Great Depression. Why would you do that now?"

The totem of the huge New Labour overspending that has brought us all to our knees is fiction. This might explain why the opposition never complained about it at the time. There was an upturn in national debt after the financial crisis and the bailouts, and "you couldn't have carried on like that indefinitely", says Mendelson. "But with some moderate constraint, washing out the transient effects of the crisis, the rate of increase of the debt would have been moderated."

But that is just the beginning of how phoney the coalition's war against debt really is. If we're nothing like Canada we're nowhere near Ireland either. "Ireland didn't have a debt crisis. Ireland had a balanced budget, it had a very low debt-to-GDP ratio. Ireland's problem started because they decided to guarantee all the bank debt. So if you want to look at the Irish problem and say 'we don't want to end up like that', the first thing to ask is 'what's the structure of the UK bank debt?'"

Nobody's asking that because to accuse the banks of anything is taken as the last resort of the deficit denier. It's time to own up to that, instead of backing away. It's time to start denying this deficit properly. Imagining for a second that even with this misinformation and mismanagement the economy pulls through, what's the best-case scenario?

"If the world continues to recover economically you'd probably be looking at continued slow rise in unemployment for another couple of years, a stagnant GDP, you'll probably miss the deficit targets, unless they have been purposefully understated. And then, four or five years hence, you will begin to recover, much more slowly than the rest of the world. Your debt-to-GDP ratio won't be that much better because your GDP won't have grown that much and your debt remains your debt. But sure, you'll be into a period of renewed growth four or five years hence, after a significant amount of pain."

And that growth would have happened anyway?

"Well, it would have happened a lot sooner."

The good news is that I'm out of space to pass on the worst-case scenario.