Ben Chu: The chill winds of real austerity have yet to bite

We are all making a lot of fuss about nothing. The cuts aren't even a scratch. Indeed, the Government is actually increasing public spending. That's the startling verdict on George Osborne's austerity programme that has been advanced by the Conservative MP for Wokingham, John Redwood.

"The Government and the Office for Budget Responsibility tell us that real public spending rose by 1.5 per cent in 2010, by 0.3 per cent in 2011 and is forecast to rise by another 0.5 per cent this year" says Mr Redwood. "Of course there are individual cuts, to help pay for the increases in health, overseas aid, EU spending and the other growing areas. It is, however, important to understand that there has been and still is a rise in overall current spending, not just in cash terms but also after allowing for inflation." That doesn't sound so bad now, does it?

But is Mr Redwood right? In one narrow respect, yes. Current government spending – on things like public sector workers' wages, schools and hospitals – has indeed been rising slightly over the past two years. But what Mr Redwood omits is that government capital expenditure – what departments spend on new buildings, new social housing and laying down new road and rail links has been contracting sharply in real terms. During 2011, capital investment spending by the state shrank by 13 per cent. This year it will fall by a further 5 per cent. Furthermore, even current spending – the measure that Mr Redwood prefers to use – is set to fall sharply from next year onwards.

Contrary to what Mr Redwood says, the unwritten story of this austerity programme is not how mild it has been, but how much more is still to come. Most of the tax rises the Government laid out in its "emergency" Budget of June 2010 have now been enacted. VAT has risen, bumping up prices in the shops. Yet 80 per cent of the spending cuts are still pending. This is going to be painful. The Office for Budget Responsibility, the Government's official forecaster, estimates that 120,000 jobs will be shed from the public sector every year between now and 2017. And unemployment is already at it highest level in 17 years.

The Institute for Fiscal Studies points out that we have never experienced more than two years of real- terms government spending cuts before in this country. Yet we are now facing seven years of contraction. We are truly in uncharted territory. That, in itself, is no reason to put off tackling our massive deficit, which is still around 8 per cent of GDP, or £120bn. We cannot continue borrowing such sums indefinitely. And if the economy rebounds strongly in the coming years, the austerity should be bearable. The planned cuts would only take public service spending back to its 2004-05 level in real-terms by 2016-17, more or less where it was before the financial crisis.

But the danger is that such deep Government spending cuts, in the context of a stagnant domestic economy and recession among our major European partners, will worsen our national fiscal predicament and prove counterproductive. The spending cuts, by increasing joblessness and hitting the order books of construction firms, could suck consumer spending and investor confidence out of the economy. Lower spending will result in lower economic activity. Lower economic activity will result in lower tax receipts. And lower tax receipts will result in higher than expected government deficits.

That vicious circle nightmare might not happen, but it's a risk. The debate over whether the cuts are too fast will continue. And as we learn how the economy is faring over the coming months, we might find some people changing their minds. But about one thing we should be in no doubt: this is not a fuss about nothing.

I can hardly use a spot painting to pay for a pasty at Greggs, can I Damien?

Damien Hirst has proven his financial acumen over the years. But his economic expertise leaves something to be desired. This week, Hirst, unveiling his retrospective at Tate Modern, called art "the greatest currency in the world". But art isn't a currency at all, let alone the greatest in the world. Currencies have two vital qualities. They must be a medium of exchange and a unit of account. Art doesn't fit either. You can't pay for your pasties at Greggs with Hirst spot paintings. And your bank statement doesn't tell you that your savings are worth 1,000th of Tracey Emin's unmade bed. What Hirst meant is that art is a great asset, which is something very different.

Still his analogy was on the money in one respect. Since the end of the Gold Standard – when paper currencies could be exchanged for chunks of yellow metal – the value of money has been solely determined by the confidence of the public in the authorities that issue the notes and coins. If people are going to keep their savings denominated in a certain currency, they have to have faith that the authorities of the issuing country are not going to erode the value of their holdings by printing too much of it. The economic value of a work of art, similarly, is solely determined by the confidence of collectors and investors in the quality of the artist. When confidence goes, currencies can crash. And so can art prices.