The ConDem coalition has painted a picture of economic doom in Britain in advance of its ’emergency budget’ next week. The books were far worse than we feared, they say. Massive cuts will have to be made that, according to Cameron, will “affect every single person in the country”. Meanwhile, Nick Clegg promises that there will be no return to Thatcher style cuts, yet supports the cuts model of 1990s Canada which increased unemployment, damaged healthcare and limited access to higher education. The fact that Britain’s economy is not in disastrous shape, and that Treasury miscalculations mean that the deficit is £11 billion lower than previously thought, hardly seems to matter. However, leading economists, business organisations and, most notably, the US government, have all lined up to oppose deep public spending cuts.

If you read much of the popular press it seems to have become received wisdom that brutal austerity measures are the way forward – the 13 June Observer opened its coverage of the economy with the headline ‘Europe embraces the cult of austerity’. Across Europe, from powerhouses like Germany to economic basket cases like Greece, the attitude is apparently the same – austerity is the answer.

The crisis facing the eurozone, where rioting in Greece continues unabated, while Spain and Portugal have also had their credit ratings downgraded, even on the back of painful austerity budgets, has also given the ConDems a new line to peddle – that if we don’t follow with massive cuts, then the credit rating agencies will take away our coveted AAA credit rating. But this is a fallacy, and the coalition should not kid itself and the country that making Britons swallow horrible medicine is necessary. Britain’s debt has an average of 14 years before it matures, twice as long as most European countries, so we don’t have to go to the markets each year to re-finance our debt. Consequently, we are also less sensitive to interest rates.

Meanwhile, an increase in unemployment – the inevitable result of massive public sector job cuts – will lead to declining tax receipts, higher social security costs, and a higher deficit. While mass unemployment is never a price worth paying, creating mass unemployment in the misguided hope that it will appease the markets is the economics of the madhouse.

However, the US is taking the opposite approach. Both Democrats and (most) Republicans agree with President Obama’s treasury secretary Tim Geithner that European countries rushing to austerity would hurt the US economy and make Europe in the 2010s what Japan was in the 1990s.

Similarly, Nobel Prize winning economist Paul Krugman has warned against government spending cuts before we can see sustained economic recovery. Indeed, Krugman has stated that, “the right thing is to do things that will reduce spending and/or raise revenue….after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity”.

Domestically, there is also a great deal of opposition, particularly amongst business leaders. The British Chamber of Commerce reported two weeks ago that it had revised up its growth forecast for 2010 to 1.3 per cent, but has revised down its growth expectations for 2011 to 2 per cent, calculations made on the basis of a VAT rise, other tax rises and a reduction in public sector borrowing from £156 billion in 2009 to £147 billion in 2010/-11 and to £116 billion in 2011-12. These figures are, actually, broadly in line with what Alistair Darling set out in his last budget. Meanwhile, the Forum of Private Business has urged the Coalition to increase apprenticeship schemes to reduce youth unemployment and measures to support entrepreneurs. Yet, the Coalition is unlikely to offer any stimulus to the private sector, with cuts expected to the business and enterprise budget that aids small businesses.

What we will probably get will be a combination of tax rises: hopefully a substantial increase in Capital Gains Tax (CGT) on property and shares, which would be entirely fair and should be supported unless there are too many exemptions, and others like increasing VAT which should be strongly opposed. A VAT rise, because it hits everybody, hits the poorest hardest and should be opposed, as should swingeing public spending cuts that will undermine the great improvements in our schools and hospitals under Labour.

In particular, cuts to child benefit and higher tuition fees will undermine social mobility for a generation, and increase the gap between rich and poor. Meanwhile, cuts to university research funding at a time when European countries are struggling to match the quantity and quality of university graduates and business innovation from China and India, is economically short-sighted.

The coalition also has an opportunity to make the tax system fairer, such as increasing capital gains tax as already suggested, but also by lowering the inheritance tax threshold and by raising the threshold at which people start paying income tax. I fear that, to varying degrees, they will flunk all three.

Labour should be rigorous in campaigning for a fairer tax system. But, most importantly, we must continue to oppose drastic public spending cuts. Our economic recovery remains weak, so the emphasis of the new government should not be on cuts but on growth. After all, it is growth, not cuts that will pay down our deficit. When the Brown government re-embraced Keynesian stimulus measures when the crisis hit, this limited this extent of the recession. The fact is that without our stimulus measures unemployment would be 500,000 more than it currently stands, meaning that tax receipts in 2009 were much higher than expected.

When you have weak economic growth, and a large budget deficit, the best approach is a combination of prudent cuts, made up largely of efficiency savings, alongside targeted investment at specific areas where there is very strong growth potential such as research and development, innovation and green technologies.

Nonetheless, we still all fear that the ConDems will start their demolition job next week. But as Krugman says, the mad rush towards cuts in the desperate hope that this is what the markets want is nothing less than “utter folly posing as wisdom”. The tragedy is that it need not be like this.

Photo: kozumel 2008