Leading article: An economic morality lesson in a time of deep uncertainty

Spending cannot go on for ever, but right now it might be our best hope

The usual pre-Christmas shopping surge and the religious contemplation traditionally associated with this time of year have always rubbed up rather awkwardly together. But this year, with Britain in recession and the Government desperately trying to stimulate our economy, the two phenomena are chaffing even more uncomfortably than usual.

The Archbishop of Canterbury, Rowan Williams, created a stir this week when he criticised the Government's efforts to alleviate the economic downturn on moral grounds. Asked about the encouragement for consumers to spend through a 2.5 percentage point cut in VAT, he remarked: "It seems like the addict returning to the drug... I hope people understand that spending is about need before it's about saving the economy in the abstract."

It is a reasonable point. And a great many in the country, as they witness their savings hammered by interest rate cuts from the Bank of England, will also be pondering the morality of official policy. Excessive borrowing and runaway consumption helped to propel us into this crisis. How can it be right to encourage us into yet more spending? Is this a sustainable response to the challenges thrown up by the crash?

The short answer is no. We cannot continue running our economy on the fuel of easy credit. As a country, we must start living within our means. And that means our unhealthy reliance on retailers, an inflated housing market and financial services for economic growth cannot go on. The Archbishop is perfectly right, in that respect, to call for new thinking.

Yet economies are like supertankers; they take time to change course. And, in the present lethal economic climate, if we collectively – and all at once – try to reverse our direction we will surely sink. If the banks, with their sudden desire to reduce their own borrowing, withdraw credit en masse, perfectly viable businesses will go to the wall, along with those that have been run badly for years. If indebted consumers suddenly decide to pay off their loans and cut back their spending in shops, demand will be sucked out of the economy on a massive scale. We will all suffer, prudent and profligate alike. It is what economists call the "paradox of thrift".

That is the context in which we should evaluate the radical action the Government and the Bank of England are taking to cushion the downturn. Criticisms of decisions taken by ministers so far are entirely legitimate. The cut in VAT, for instance, was never likely to be big enough to stimulate demand sufficiently. And there are undeniable risks in the reflationary strategy. If Government deficits rise as projected, there is a significant chance that sterling will come under even greater pressure, possibly even precipitating a run on the pound.

Then there are the mooted state lending guarantees to stricken manufacturers such as Jaguar Land Rover. The history of industries that have been bailed out by the state in the past is not encouraging. The action that the Bank of England is considering to prevent entrenched deflation carries massive risks as well. Flooding the economy with cash risks a massive inflationary hit further down the line.

These risks are properly the subject of vigorous political debate. But we cannot ignore the dire potential consequences of not acting either. Perhaps the economic morality we need to pay heed to in this time is that of St Augustine: "Grant me chastity and continence, but not yet."