Top Tories Reject Clamour for Plan B

There is no need for a “plan B” for the economy even if conditions change, senior Conservatives insisted on Sunday as Ed Balls renewed his attack on the government’s “reckless” deficit reduction program.

Britain's Prime Minister David Cameron (front 2nd Left) calls an end to a group picture with his new cabinet ministers in the garden of Number 10 Downing Street in London, England.
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Britain's Prime Minister David Cameron (front 2nd Left) calls an end to a group picture with his new cabinet ministers in the garden of Number 10 Downing Street in London, England.

The row was sparked by a letter to The Observer newspaper, signed by 52 academics and economists, arguing that George Osborne should slow down his “self-defeating” cuts because they could jeopardize the economic recovery.

William Hague, foreign secretary, said there could not be the “luxury of a plan B” and there was no alternative to reducing the debts left by the last Labour government.

“If we wavered from that for a moment, then economic confidence would be reduced, the confidence of the financial markets would be very severely affected, so it is vital to continue on the course that we have started,” he said.

Government insiders said they would not retaliate by organizing a letter from other economists supporting their plans: “We can still cite the IMF [International Monetary Fund], OECD [Organisation for Economic Co-operation and Development], G20 [Group of 20 leading economies], EU [European Union], CBI, other business groups and lots of economists in support,” said one senior Treasury figure.

But Mr Balls, shadow chancellor, believes that fresh economic figures have confirmed his belief that the economic recovery is threatened by the scale of the cuts.

A slew of negative data has darkened Britain’s economic outlook and a variety of organizations, from the IMF to the CBI, have downgraded their forecasts for UK growth.

History had shown that “the right and credible thing to do is to change course,” Mr Balls told Sky News.

Matthew Hancock, a Tory backbencher, retaliated by accusing Mr Balls of making unfunded spending pledges and overstating the difference between Labour and Tory plans.

Economists are divided over the need for the government to spell out a “plan B”, with many unconvinced that the time has come for changing tack.

Paul Johnson, director of the Institute for Fiscal Studies research group, said: “To some extent, the debate is ridiculous. Of course if the economy tanks, you would adopt a different approach. Have things changed so much in the past 12 months that you would expect the government to change course now? No.”

Danny Gabay, director of Fathom Financial Consulting agreed, urging the government to “hold its nerve”. “I am not remotely convinced that the weakness in the UK economy is either surprising or anything to do with the government’s fiscal policy,” he said.

“It is true that the economy is weak, and that the government has put in place plans for fiscal austerity. But that plan has yet to have an impact, and it certainly wasn’t having an impact in the last three months of last year [when the economy contracted by 0.5 percent], since government spending was still accelerating.”

Others were less sanguine. Professor John Van Reenen, director of the Centre for Economic Performance at the LSE said “given the evidence that the economy has been flatlining for the past two quarters, slowing down the spending cuts would be the better option.”

However, he said “the problem with adopting such an approach now, though, is that having tied itself so firmly to the mast of austerity, the government may be severely punished by the markets if it rows back on plan A.”

This may prevent the government from changing course in the short term but even economists who back the coalition’s strategy recognise that if the economy continues to struggle, a rethink could be necessary.

One potential trigger could come if the Office for Budget Responsibility were to reduce its growth forecasts for the next five years significantly, implying that the government would break its fiscal rules.

“George Osborne would then have to choose between two pretty unappealing alternatives: cutting harder and raising taxes, or breaking the rules he set only a year ago,” said Mr Johnson.