This speech was originally given in parliament in the Budget Debate on 28 April 2009

Because the economy is contracting faster than the Treasury expected only five months ago, the Chancellor was right in this Budget to give a further fiscal stimulus, expanding the one announced in November.

It brought total fiscal support through discretionary action in the budget, the pre budget report and the automatic stabilisers, to four per cent of GDP, on top of the other action to boost the flow of credit and cut interest rates. Goodness knows where the economy might be heading now if the government had instead followed Conservative cuts strictures, and had not acted promptly to adopt a Keynesian response to the crisis.

The budget also did the right thing by boosting public investment this year, to £44bn compared to the £35bn the chancellor was planning to spend twelve months ago. These are exactly the right kind of priorities to stop a slide into slump. Exactly the right strategy to ensure the recession is not deeper and longer.

Conservatives seem to forget that the purpose of extra public borrowing is to make up for the collapse in private spending brought about by the global financial crisis. By helping families who are in danger of losing their homes and their livelihoods, by helping firms that cannot spend because their banks will no longer lend, government can stop economic casualties being turned into social catastrophes. Without such government action and borrowing, millions more jobs, and tens of thousands more businesses, would be in jeopardy.

Borrowing is rising because of the impact on UK public finances of the world economic crisis, not the so-called ‘public spending extravagance’ beloved of the leader of the Conservative party and his right wing media allies. The Institute for Fiscal Studies reckons that the global financial crisis is costing the Exchequer £90bn per year, due to lost tax revenues and higher social security costs. The fiscal stimulus since last year’s budget accounts for only about £26bn of the nearly £400bn increase in government debt to 2012, or roughly one fifteenth.

No one foresaw the severity of the crisis currently gripping the global economy, either here or elsewhere in the world. Maybe that’s why, after 15 years of expanding UK employment, and Labour’s 11 years of unprecedented stability and growth, much of the media appears both bewitched and bewildered by the prospects for government borrowing and national debt. In one surreal moment last week I heard the chancellor on the BBC Today programme being asked (by Evan Davies) about government borrowing for the budget – not last week or even next year, but in 2014! Even more preposterous is media speculation about borrowing and debt in 25 years time when the average budget forecasting error is £12bn for net public borrowing looking only one year ahead. Many commentators have become spellbound by long term forecasts of public sector borrowing, quite unable to focus on the benefits that such borrowing brings, or to contemplate the truly horrendous alternative without it.

It was only a few years ago that Britain finally finished paying off its 1947 American loan that helped to pay for post war reconstruction. It took us over 50 years to do so. Does anyone seriously say that we should not have borrowed on a substantial scale to rebuild the nation’s social fabric shattered by the War? Perhaps there are some Conservatives and media commentators who sympathise with Johnny Speight’s character Alf Garnett, who criticised Winston Churchill for failing to get an estimate of the costs before fighting World War Two.

As also with owner-occupied housing, good investments are things that are worth more than they cost to acquire at the time. Who can seriously argue that governments which borrow to prevent a depression are making a bad investment?

The Conservatives have failed to learn the grim lesson of the 1930s that cutting government spending during a recession only makes the economic situation worse, causing total spending in the economy to fall even further, resulting in more redundancies, higher social security spending and even higher government borrowing and debt. Spending cuts in today’s circumstances would be a self-inflicted wound that would weaken, not strengthen, our ability to recover. They could turn business parks into gone-out-of-business parks and trading estates into ceased-trading estates.

By contrast Labour sees higher public spending and increased government borrowing to ward off recession as the right role of the state now. In our view, government’s job is to provide a safety net in troubled times, support and opportunity for the good times, and security and protection at all times. Not to leave people in the lurch to fend for themselves.

Of course the economy needs to be brought back into balance in the future. But the overriding priority today is not government debt. It is the danger of depression and rising unemployment. The bond market must take second place to the labour market.

Tackling the threat of slump – which means combining vigorous fiscal and monetary policy with unconventional measures to restore the flow of credit – is vital to recovery. But, of course, once we have warded off the threat of recession or depression there is no escaping our responsibility to bring the public finances back into shape in the medium term. That must mean reshaping the subsequent trajectory of government spending and taxation, which means cuts in some past plans, deferring other ambitions and raising some taxes on a fair basis. But today’s problems must come first.

The severity of the current threat to the world economy remains widely unacknowledged, despite the evidence of world trade falling faster than it did at the onset of the 1930s Great Depression, and despite industrial production plunging all over the world, including in the UK.

There is a reluctance on the Tory benches to admit that this recession is different from every other post war recession, both in its origins and in its scale. There is a refusal to accept that we are passing through extraordinary times which demand an extraordinary response, with action on a scale unprecedented in the post war period.

It was Franklin Roosevelt’s New Deal public works projects, combined with bank reforms and monetary measures, and not cuts, that first triggered the American turnaround which began in 1933, and then fuelled expansion over the next four years.

I have been impressed by the advice given by that lone voice on the Bank of England Monetary Policy Committee David Blanchflower. He was the first to warn of the danger of recession and to call for early interest rate cuts. He has proved consistently correct in his reading of the economy. His most recent warning is that, without strong fiscal action, today’s downturn could fall further and last longer than any recent recession, causing UK unemployment to soar towards four million in 2010, potentially condemning a generation of Britain’s young workers to years on the dole.

The Conservative party has an obligation to be straight with voters. The shadow business secretary can ooze warm reassurance with the best of them, but one only has to look at the shadow chancellor to see that it is only a short way from guile to guilt.

The leader of the opposition described the government’s record as written in red ink. When will he show us the colour of his party’s money? So far all the public have been offered is counterfeit currency. They have pledged to prioritise cutting government debt ahead of tax cuts and to restrain government spending. But they won’t come clean about the huge scale of cuts that would be needed to achieve their ambitions. They have given headline grabbing examples – regional assemblies and senior public servants’ pay – where savings would barely register on the spending richter scale. More ominously, they propose cutting tax credits for middle income families, and the pay of nurses and teachers. These people are at the centre of gravity of the economy: squeeze them and you squeeze the whole economy, as well as damage vital public services.

The Tories talk a good fight about debt, but on public spending, would they revert to Margaret Thatcher’s policy and abandon Labour’s pledge to restore the link between the basic state pension and earnings? Would they reduce the Pension Credit that helps the poorest pensioners? Would they raise the age at which people qualify for free prescriptions? Would they bring in charges for public services like visits to the doctor, or lift the ceiling on student fees in universities and colleges? Would they scrap teaching assistants in schools? To match their rhetoric on debt with their actions, cuts for low and middle income Britain would have to be savage.

The lobby group Reform has proposed a £30bn cut in government spending next year, to give the Tories a flying start for their plans. £30bn, by the way, corresponds to two per cent of GDP, exactly the amount by which the Tories cut government borrowing in their 1981 budget, which saw unemployment soar above three million and stay there for four years. So, maybe not a far fetched figure, if we want to divine the Tories’ true intentions.

Let’s look at Reform’s list. First, a 10 per cent pay cut for all doctors and NHS managers. That’s £1bn saved. Then scrapping winter fuel payments for pensioners and ending free TV licences for the over-75s. Another £3bn saved. Abolish universal child benefit and target it on low income families, saving £7bn. Raise the interest rate on student loans to market rates, another £1bn saved. Pretty soon we’ll be talking serious money. And they haven’t even started on scrapping pay deals for local government workers or cutting public sector pensions.

The media have given the Tories a really easy ride and so the Conservative leader won’t really say where they will cut public spending. Nor will they come clean about taxes. So let’s look at their record in office for a few clues.

The first budget of Margaret Thatcher’s administration saw Geoffrey Howe almost double VAT from 8 to 15 per cent, to pay for income tax cuts. The first budget of John Major’s government saw Norman Lamont raise VAT again, to 17.5 per cent, to pay for the poll tax. Can the shadow chancellor deny that he is considering raising VAT to 20 per cent if they win next time, to cut government debt and pay for cuts in inheritance and income taxes? Can he rule out dropping zero rating for food, fares and children’s clothing?

The Tories have cultivated the image of “compassionate Conservatism”. We heard that phrase first from George Bush – and we know how destructive his policies were. At Davos the Conservative leader promised “capitalism with a conscience” but it would be a guilty conscience.

Two days before the Budget a Financial Times editorial noted that tightening fiscal policy now might deepen the recession and worsen the subsequent fiscal outcome – what it termed “futile masochism”. Yet what does the leader of the opposition want? Exactly such spending restraint. And when does he want it? Now. That’s what he said in his reply to the Budget speech. By driving the economy into depression the ‘Cameron cuts’ would cause tax revenues to shrink and social security bills to swell. The outcome would be the opposite of what he promises: even higher government borrowing, yet more national debt, and mass misery for millions sacrificed on the altar of right wing Tory dogma.

Despite this, the media in general, and sadly the BBC in particular, have dutifully followed the leader of the opposition like lapdogs. They treat all government borrowing as bad, irrespective of circumstances, and hardly bother to examine the terrible consequences for jobs and living standards of the Tory alternative. It is as if the whole economic debate was being filtered through a single, false prism of debt, which is quite absurd.

Yes – this budget is a tough one. But it contains the seeds of hope. The Conservative alternative would not simply be tough, it would be disastrous – sowing the seeds of abject despair for millions, and driving Britain backwards.