Johann Hari: Britain's not bust. So don't use it as an excuse to impose cuts

The move to slash public spending is based on a faulty reading of economics

(DARREN DISS)

We thought the fever of this autumn was going to be swine flu, but we were wrong. It has turned out to be National Debt Hysteria. Our entire political class has taken to their beds with this fever, crying for nurse to bring cuts, cuts, cuts. The symptoms are simple: the sufferer becomes convinced that debt levels lower than almost all other wealthy nations, and lower than almost all of modern British history, are "a disaster", and so we must immediately slash our spending. They keep up this wail even though the most qualified doctors, like the winner of this year's Nobel Prize for Economics, Professor Paul Krugman, stand by their beds and tell them this will bring our real sickness, the recession, back with a vengeance.

The hysteria will reach a Cameroonian crescendo today when the Tory leader delivers his party conference speech promising Austerity For All. (Except for millionaires like himself, of course, who will receive a massive inheritance tax cut.) So let's calmly study the patient – and see how this National Debt Hysteria is going to do us far more harm that the real national debt ever could.

Let's start with a few facts that have been forgotten. Britain went into this recession with one of the lowest debt levels in the developed world. According to the International Monetary Fund, Japan's debt in 2008 was 198 per cent of national GDP, Italy's was 104 per cent, Germany's was 76 per cent, France's was 65 per cent, the US's was 61 per cent, and Britain's was 43 per cent. All countries have rapidly increased borrowing during this recession – for very good reasons we'll get to in a second – and Britain has nudged closer to the middle of the league table. But to claim, as Cameron does, that Gordon Brown had "racked up debts in the good times" so we "can't afford more" is simply untrue.

Cameron and George Osborne say that a national debt at 75 per cent of GDP makes a country "bust." Using this measure, the most successful economies in the world are bankrupt, and have been for a long time. Japan has apparently been trebly "bust" since the 1970s, yet it has just elected a government committed to higher public spending. The US, Germany – "bust" and "bust", yet spending more.

Oh, and Britain has been "bust" for almost its entire history since the 1750s if Cameron's standard is right. There have only been two 40-year periods when we had a debt that dipped below Cameron's supposed catastrophe-level: the end of the 19th century, and from the 1970s to now. As the economist Will Hutton puts it: "From 1750 to 1870, Britain won wars, assembled an astonishing navy, built an empire and launched the Industrial Revolution to become the envy of Europe, yet the national debt was consistently above 80 per cent of GDP. Nobody cared. High national debt was a precondition for winning two world wars in the 20th century. Periods when the over-riding preoccupation has been lowering the national debt have coincided with industrial, economic and strategic decline. So it will again."

So is the world – and Britain's history – bankrupt, or is Cameron's reasoning? In all indebted countries, there have always been people who warned that the fiscal sky was about to fall in. In 1752 the philosopher David Hume cried: "Either the nation must destroy public credit, or public credit will destroy the nation." As the great historian Thomas Macaulay explained: "At every stage in the growth of the debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt went on growing, and still bankruptcy and ruin were as remote as ever."

But on the basis of this faulty reading of economics, we are about to dramatically slash our public spending – in a way that will cause real harm, rather than the phantasms conjured by Cameron.

There is a reason why governments should increase spending in a recession, explained by John Maynard Keynes from the 1920s onwards. When the economy sickens, businesses and consumers stop spending except on essentials. This causes demand to fall. If the government cuts back at the same time, then nobody is buying anything – and recession turns into depression. The only way out is for governments to pick up the slack and borrow money to spend on public projects and subsidies that get money running through the economy again. Then, once we are back to work, the government pays down the debt with the proceeds of growth.

This has been demonstrated to work time and again. In a recession, it's irrational for you to rack up debt, but essential for the government to. Keynes called this "the paradox of thrift." Yet Cameron and Osborne deny these truths: Osborne actually claims public spending claimed no role in ending the Great Depression.

What happens if governments – in the middle of rising unemployment – panic about debt and stop stimulating the economy? We don't need to speculate. During the 1930s, Franklin Roosevelt launched a huge stimulus funded by debt, and the economy began to recover. Then, in 1935 and 1936, he was besieged by people offering the Cameron argument: the recovery will be stronger if we cut the debt now. The result was that the depression came back with a nasty slap, and it was only wiped out when the gigantic stimulus of the Second World War sent debt soaring to 119 per cent of GDP. This debt was easily repaid once this stimulus paved the way for the biggest boom in American history.

Cameron and Osborne would repeat this mistake. When I read their statements to Krugman – the Nobel Prize-winning expert on depressions – he said he was "shocked." I asked if this approach would make the recession worse, and he said: "Yes. For sure." Professor David Blanchflower, until recently on the Bank of England's monetary policy committee, warns that Osborne's cuts could well send unemployment soaring to five million.

Indeed, Cameron's cuts set us up for failure twice over. Stimulus spending can – if it's done well – not only get the immediate economy running again, but set us up for future success. A recent detailed US study by Colombia Teachers' College found that cutting high-school dropout rates in half would generate $45bn in new tax revenues, by saving on welfare payments, imprisonment, and so on. Cameron is proposing to do precisely the opposite. He will end the Educational Maintenance Allowance of £30 a week that makes it possible for poor kids to stay on to sixth form college, setting them up for a lifetime of diminished expectations.

So why is Cameron getting away with it? Partly, of course, it is due to a media that has an allergy to arguments that take more than 30 seconds to explain and a bias to the Tories. But it is also due to a failure by Labour and the Lib Dems. Instead of standing up for the idea of a debt-funded stimulus to get us through the recession, they have panicked and accepted the bogus Tory framing. They have been reduced to whimpering: we do need cuts now, only we'll be a little nicer in the way we do it. It has been a disaster. The British people are not having the looming Cameron slasher flick explained to them: we will only grasp the plot once the film has begun.

The biggest risk to our economy today is not debt, it is the fear of debt. Somebody needs to invent a Tamiflu for our national hysteria before we start frantically cutting into our flesh to carve out a hallucinatory disease.

j.hari@independent.co.uk