Recessions come and go | Colin Talbot
The growing consensus that "there must be cuts" is unfortunate, because it has cut off any real discussion about exactly how big, and how long-term, the crisis in public finances is.
Before the crisis hit, it was fairly clear that there was already a relatively small hole in the public finances – a "structural deficit", in the jargon – as the government was getting less in from taxes than it was spending. The public deficit was creeping up and was passing Gordon Brown's 40% of GDP ceiling.
At 40%, however, public sector debt was, historically, at fairly low levels – it has been much higher – and across the developed world this was at the lower end. Even at 60%, it would not be exceptional. It is now set to rise to 80%-plus.
This sudden jump has been caused mainly by the collapse of tax income, not extra public spending. Taxes will come back, but as yet it is not clear how much, because of the shrinkage in the financial sector. So we don't know how big the ongoing structural deficit will be.
Some cuts probably are needed, as well as some tax rises, but consuming our public capital to get us out of a mainly short-term public finance crisis would be an absurd over-reaction. And ironic, given that, in the current crisis, a remarkable feature of some private sector reaction has been to try to preserve capacity, rather than the "slash and burn" practices in previous recessions.
Capitalists have learned that recessions come and go, and policies should be more long-term. It would be weird if just as they start to learn this, we started dismantling the public domain because of a short-term crisis.
Colin Talbot, profesor of public policy, Manchester Business School