Looking back over what I was writing in 2009 is a little sobering. I'm not sure I'd agree with all of it now. In particular I was fretting tremendously about the deficit, and how dangerous I thought it was. Today I'm far more worried about unemployment and the output gap.
It's interesting to consider why I thought what I did, and what's changed my mind since then. There are plenty of commentators tearing their hair out at the government for not changing its mind in a similar way - however, from what I can tell, they are the commentators who never agreed with the government in the first place. So perhaps I have a different perspective to add.
Back in 2009 I was declaring that I couldn't overstate how dangerous I thought the deficit was. What seems to have driven my fears was:
a) the threat of a gilt strike - there had been a wobble on the markets where it looked like the government might struggle to sell all its debt. At a time when we selling a lot, and would have a lot more to sell in the future that looks scary. It was big news at the time, but we've probably nearly all forgotten about it now.
b) driving up interest rates - I had a conviction that nearly all the governments and firms were trying to borrow at once. Had this been true then there would have been a risk of driving up interest rates and crowding each other out. However, it errrr wasn't true. Firms in particular aren't trying to increase borrowing - in fact they've been doing the opposite. I failed to spot a liquidity trap when we were in one.
c) the long time horizons - the deficit and debt projections in 2009 were frightening. I remember being in a public debate at the London School of Economics where two professors were giving the opposite arguments about the deficit. They showed the projection that had the UK only managing to balance the budget by 2020. Ten years of deficits looked utterly, and horrifyingly, unreal to me. At the time I declared that a plan that didn't assume you did it by the end of the Parliament didn't assume you did it at all. I was, and really still am, very distrustful on the stated ability of governments and politicians to do things which involve long-term decisions. What I failed to recognise was that solving the deficit is easier said than done if austerity depresses the economy.
I suspect the government shared some of my fears, but I also suspect they had some reasons that were all their own:
a) a conviction that public spending was out of control before the crisis, and that it needed to be reined in and the state shrunk. Hence, quite a few of the spending cuts we've seen touted already sound a lot like things this government might have liked to do anyway (benefits cap for example). This, alas, is opportunism dressed up as pragmatism, exploiting a crisis to satisfy an ideological agenda. Some of it is very unpleasant, as the usual checks have been turned off. Whereas ordinarily those wishing to cut benefits would have been subjected to a lot of scrutiny and contest on all sides (because it can be quite controversial), the advocates of such cuts are able to escape the criticism by declaring its all necessary because of the need to close the deficit.
b) being scarred by Black Wednesday. This, I think, drives senior Ministers (PM and Chancellor) more than anything, and likely underscores their fear that the markets will turn against the UK is they don't stick to austerity. Cameron was working in the Treasury as a press adviser to then Chancellor Norman Lamont during Black Wednesday in 1992. He saw the markets turn against the UK, and break the government's economic policy at first hand. The power of the markets is therefore a very real thing for Cameron - he doesn't imagine, he remembers. Now the lesson might not be valid, but politicians are informed by the circumstances in which they cut their political teeth. Just as Blair was unable to raise income tax because he remembered Labour's defeat in 1992; Cameron is unable to consider disagreeing with financial market commentators because of Black Wednesday.
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