Spending cuts could cause harm

There is a huge conversation to be had over the economy – it’s just that most people are unaware of it.

Labour is consulting with Joseph Stiglitz and Thomas Piketty, and its policy developments may certainly be something to watch out for in future given that Piketty favours significant wealth taxes to address inequality.

But the conversation I want to focus on is not between the political parties – or not any more, at least. It is, however, an argument that cuts to the heart of the current UK practice of activist monetary policy and fiscal restraint.

In his assessment of market turmoil, economic uncertainty and more, Chancellor George Osborne is preparing us for more cuts as he pursues a deficit-reduction target which, he argues, will be the foundation for future success.

This fits neatly with all those intensely political economic slogans and statements such as ‘cleaning up Labour’s mess’ and ‘not spending money you don’t have’, which annihilated Labour’s chances in the last election.

However, it is not Labour but the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) on which we should be focusing attention. Neither is exactly a hotbed of left-wing radicalism, but their views have diverged considerably from those of the Chancellor.

Specifically, the IMF and the OECD want to see policy action which borrows more from John Maynard Keynes than Milton Friedman, though the talk of ‘helicopter money’ now emerging is based on a term first coined by the latter.

Chancellor George Osborne is preparing us for more cuts

The IMF suggests that “flexibility in the fiscal framework should be used to modify the pace of adjustment in the event of weaker demand growth”.

OECD economist Catherine Mann says: “With governments in many countries currently able to borrow for long periods at very low interest rates, there is room for fiscal expansion to strengthen demand in a manner consistent with fiscal sustainability.”

Both organisations want co-ordinated action by leading economies to spend and invest more. They also hint central banks may have gone as far as they can with monetary policy. Indeed, the OECD says continued fiscal contraction may be hurting economies and causing market volatility – the opposite of received wisdom.

The view does find favour with some in the retail investment industry, such as Peter Toogood at City Financial, who says central banks have no weapons left, so governments need to invest – whether that be in housing, or indeed via ‘helicopter money’. He adds that ultra-low interest rates are the opposite of what’s required, in terms of the temptation they provide for indebted companies and consumers to keep borrowing.

Yet, as I say, this argument has not really made it out of the investment pages, and there is little debate on the airwaves.

Meanwhile, virtually unchallenged, the Chancellor says he will cut further, in keeping with all those election slogans. But what if cuts – including to pension tax relief – don’t make economic sense? I for one want to hear a full debate – and I think advisers and their clients should, too.

John Lappin writes on industry issues at www.themoneydebate.co.uk