IN our eagerness to follow the UK into austerity, the spectre of what has been described as ‘deficit fetishism’ looms ever larger in the Island. Yet nobody seems to care.

While at least in the UK there is a lively debate about the impact severe cuts in government spending will have on the economy, Jersey worries about school milk.
Perhaps the case for wholesale, rapid cuts is so blindingly obvious – as some politicians and Islanders seem to believe – that there is nothing more to be said. We have to cut, cut and cut again, until we bring that demon of a deficit under control, regardless of the impact on the economy let alone the quality of services provided to Islanders.

So in Jersey we have had none of the warnings they have had in the UK from leading economists who believe this may not be the right time to cut spending, or that the cuts are so severe that they will damage the UK’s growth prospects for years to come. They may all agree that the UK’s deficit has to be tackled; they just disagree about the timing and scale of the solution.

The problem in Jersey, of course, is nowhere near as severe. Our projected budget deficit is the equivalent of 1.5% of GDP – the UK’s is 10.5%. We have no debts, while the UK has debts coming out of its ears. Yet some experts in the UK are calling for caution when dealing with this obvious crisis, while Jersey’s problem is not similar but we are planning to use similar drastic measures.

All this is happening with hardly a peep from anyone in the States, or even outside the States. For example, you would imagine that some of those outspoken businessmen who have been calling for cuts in States spending for years would be taking a more measured approach now that they realise what less spending by the States means to their bottom line. Or perhaps they don’t realize – yet.

It’s true that we have had a couple of backbenchers and union-types worried about manual workers and civil servants losing their jobs (sorry – correct that: no-one seems to worry about civil servants losing their jobs). But as is so often the case in Jersey, we get bogged down in the detail and fail to see the bigger picture. That big picture is that ‘deficit fetishism’ can damage the economy.

The phrase was coined by Joseph Stiglitz, Professor of Economics at Columbia University, in an article way back in March. He wrote: ‘Most economists … agree that it is a mistake to look at only one side of a balance sheet (whether for the public or private sector). One has to look not only at what a country or firm owes, but also at its assets.

This should help answer those financial-sector hawks who are raising alarms about government spending. After all, even deficit hawks acknowledge that we should be focusing not on today’s deficit, but on the long-term national debt.

Spending, especially on investments in education, technology and infrastructure, can actually lead to lower long-term deficits. Banks’ short-sightedness helped to create the crisis; we cannot let government short-sightedness – prodded by the financial sector – prolong it.’

Sounds familiar? Well Professor Stiglitz went on to claim that the faster growth which is fostered by public spending yields higher tax revenues, which quickly wipes out any temporary increase in national debt and also avoids the ‘social costs’ of lower government spending.

A premature exit from deficit financing risks pushing the economy back into recession, he said, and that presumably applies to small economies such as Jersey as well as the United States and the UK.

‘Over the longer term, most economists agree that governments, especially in advanced industrial countries with ageing populations, should be concerned about the sustainability of their policies,’ Professor Stiglitz wrote. ‘But we must be wary of deficit fetishism. Deficits to finance wars or give-aways to the financial sector (as happened on a massive scale in the USA) lead to liabilities without corresponding assets, imposing a burden on future generations. But high-return public investments that more than pay for themselves can actually improve the well-being of future generations, and it would be doubly foolish to burden them with debts from unproductive spending and then cut back on productive investments.’

In case anyone thinks that only American economics professors believe this, you should refer to a recent report from the independent Work Foundation. They bemoaned the fact that in the UK, most of the debate has been about reducing the deficit through public-spending cuts and taxes.

That’s not the case in Jersey, of course. Nearly all the debate has been about public spending cuts; we haven’t even started on taxes yet, and we have all but ignored economic growth as a tool for deficit reduction (probably because it involves spending money).

As the Work Foundation said: ‘We believe that while the current mood of austerity means that cuts are certain and tax rises highly likely, ultimately the government needs a narrative about growth. Any successful deficit reduction strategy must include a strategy for encouraging growth and jobs, and this has so far received little attention in the public debate.’

The Work Foundation warned that deficit reduction should also be dependent on recovery in the private sector, and not damage it, and that the long-term aim should be to focus on where Britain’s competitive advantages are likely to be, and to concentrate on them.

So what have we got in Jersey? Well, we’ve got a fiscal stimulus package in which most of the money has been spent on keeping people employed in the construction industry. Apart from the fact that construction is unlikely to be the engine for future economic growth, the stimulus is only temporary. It will come to an end soon, and like heroin, it’s going to be difficult to wean some businesses off of it.

The theory, of course, is that the economy will have picked up by then, but there are no guarantees and we are doing very little to try to make sure it happens.
Indeed, by dramatically cutting public spending, we could be doing quite the reverse.
In the UK, for example, the Business Trends Survey carried out by accountants BDO recently recorded its largest fall in business confidence since 1995.

‘The government has understandably been keen to emphasise the extent of the sacrifices that we all will need to make as public borrowing is brought under control,’ said Peter Hemington, partner at BDO.

‘But there is a significant risk that the rhetoric has begun to have an impact on business confidence, and fears of the economic impact of spending cuts may be causing businesses to rein back on growth plans.’
It couldn’t happen in Jersey, of course.

Peter Body is editor of Business Brief magazine