How honest are the Conservatives about our public debt?

By Mark Dominik

Since the beginning of the economic downturn, David Cameron has relentlessly insisted that Britain is in the midst of a “massive debt crisis” – a crisis that is so severe that the government might be obliged to default on its debt or go to the IMF for a bailout.

Cameron’s statements – which he echoed again in his regular press conference yesterday when he accused Gordon Brown of “moral cowardice” for not cutting spending this year – are alarming, to be sure. But how honest is the Conservative leader being about the state of Britain’s public finances?

He is right that Britain has the highest budget deficit in the G7. This deficit must be brought down over the next few years, and leaders on both sides of the dispatch box agree on this point.

But Cameron’s assertion that Labour has left us with a “decade of debt” because “they didn’t fix the roof while the sun was shining” is patently untrue.

Going into the financial crisis, Britain’s public debt – defined as general government gross financial liabilities – as a percentage of GDP was the lowest in the G7, and it remains that way today.

At the end of 2009, Britain’s public debt stood at 71% of GDP, according to OECD figures, well below those of our major industrialised peers Germany (77.4%), Canada (82.8%), the United States (83.9%), France (84.5%), Italy (123.6%), and Japan (189.3%).

It is true that in the years ahead, Britain’s public finances will be hit harder than those of many of our G7 peers, and our public debt as a percentage of GDP will probably pass Germany and Canada’s. But these forecasts are not written in stone.

Limiting the increase in the debt as a percentage of GDP depends on a number of factors. Most important among these is restoring economic growth, because it both reduces annual deficits as tax revenues rise, and because it increases the overall size of the economy that supports the debt.

Ensuring that we resume growth as quickly as possible requires continued investment and consumption today. When consumer spending falters, as it has during the economic downturn, the government must step in with temporary measures to stimulate the economy.

Throughout the economic downturn, Labour has developed and delivered the right proposals to promote economic recovery. These include the car scrappage scheme, the VAT cut, and other measures such as the small business loan support scheme.

Labour’s stimulus package has been in line with those that our peers around the world have put in place.

Yet at every turn, the Conservatives have opposed these measures, arguing that the UK could not afford a fiscal stimulus – with complete disregard for the country’s low public debt compared to its peers. This stance is not just illogical; it is also irresponsible, imperilling the recovery.

In the midst of the crisis, France’s brilliant Finance Minister, Christine Lagarde, was asked about the cost of the stimulus measures they were putting in place. She replied:

“When your house is on fire, you do not look at the water bill. Today, we are engaged, at the request of the European Commission and the IMF, in a massive economic stimulus because all economists know what we must do at this moment. A massive stimulus cannot be financed in multiple fashions – it is financed by taking on debt today.”

The fire is not yet out in Britain. Economic growth has resumed, but it is tentative and fragile at this point. Nearly 2.5 million are unemployed, and this is likely to rise over the coming months. And many of the painful social effects of the economic downturn will be with us for years to come.

Last week, IMF Managing Director Dominique Strauss-Kahn warned that exiting from stimulus packages too early could cause a double-dip recession. This would be catastrophic for the UK, and must be avoided at all costs.

Yesterday, the Prime Minister echoed the wisdom of Strauss-Kahn’s remarks, saying “we are all agreed around the world that we must reduce our deficits steadily, according to a plan, but that we must do nothing this year which would put recovery, growth and jobs at risk.”

And yet the Conservatives still argue that cuts must be made immediately, as part of an “emergency budget” they will announce no more than 50 days after a general election if they win when we go to the polls.

The choice at the general election is clear – between a Labour Government that will cut the deficit carefully over the coming years, while ensuring the recovery, and a Conservative Government that will make savage cuts in the midst of a fragile economic climate.

The cost of the Conservatives’ cuts may end up being larger than any of us can imagine. As Nobel Prize-winning economist Paul Krugman has said:

“The question shouldn’t be whether we can afford to promote recovery. It should be whether we can afford not to.”