Keynes Would Be on Our Side: Throughout the Financial Crisis, Leftist Thinkers Have Claimed John Maynard Keynes as Their Own. but They Are Quite Wrong to Do So, Argues a Leading Voice from Inside the Government

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If anyone doubted it before, recent months have proved decisively that coalitions are quite consistent with radical policy change. What matters now for British politics is whether the coalition government's economic policies deliver a sustainable recovery.

The most controversial part of the debate relates to the speed at which the fiscal deficit should be corrected. It is not, however, a controversy within the coalition. The structural deficit is over 6 per cent of GDP--meaning that, even once the economy has recovered fully, the government would still be borrowing almost [pounds sterling]100bn a year. In September 2009, I argued in a Reform pamphlet that, in balancing the risks of too rapid adjustment (threatening recovery) or delaying it (precipitating a deficit funding crisis), the next government should try to eliminate this deficit over five years. Now we are in government, that is exactly what we plan to do.

Despite all the controversy, the boundaries that define this debate are relatively narrow. The outgoing Labour government was already planning a fiscal tightening of 1.5 per cent of GDP in 2010/2011. The difference between its deficit reduction plan beyond 2010/2011 and that of the coalition amounts to roughly half a per cent of GDP per annum: well within the forecasting error. Such differences, though not trivial, hardly justify the titanic clash of economic ideas advertised in the commentaries or a threatened mobilisation of opposition comparable to the General Strike. For all the protesters shouting "No to cuts", this electoral term would always have been about public-sector austerity, no matter who won the election.

As in many economic policy disputes, much of the ideological rhetoric conceals different forecasting assumptions--in respect of the cyclical, as opposed to structural, deficit; the influence of asset prices on consumer behaviour; the impact of the unorthodox monetary policy of quantitative easing (QE) and its interaction with the velocity of circulation of money; and the weight to be attached to business confidence and sentiment in financial markets. Amid such uncertainty, economic policymaking is like driving a car with an opaque windscreen, a large rear-view mirror and poor brakes. To avoid the trap of self-justifying, competitive forecasting, the government has subcontracted its forecasts to an independent body, the Office for Budget Responsibility (OBR). As it happens, the OBR has produced the reassuring estimate that, on plausible assumptions, growth should improve, unemployment should fall and fiscal consolidation should ease to safe levels over the five-year life of this parliament. But even such an independent body can only point to a range of probabilities.

This lack of solid ground has failed to discourage serious people from invoking different economic philosophies to justify polarised positions. Increasingly, the debate is characterised in terms of …