The year 1992 was the last in which the Conservative party won a British election – to the surprise of most political pundits. It had some superficial similarities to the present. Public sector borrowing was on the rise and at its peak in 1993-94 reached 7.8 per cent of gross domestic product, regarded then as shockingly high.

The strategy of Norman Lamont, the then chancellor of the exchequer, was a parody of St Augustine’s “Let me be chaste but not yet”. He began a series of phased tax increases and spending curbs which were to take place over three years and thus ensured long-term fiscal prudence while avoiding depressing the economy during a recession. His successors, Kenneth Clarke and Gordon Brown (then in his prudent phase) continued that policy so that in 2000 there was a public sector net repayment of 1.9 per cent of GDP.

Could the tactic be repeated this time round? The magnitudes are much larger. The Institute for Fiscal Studies expects the annual “baseline” deficit to average £150bn over the next three years, equivalent to about 10 per cent of GDP. The IFS predicts the debt-to-GDP ratio will climb to more than 70 per cent of GDP by the middle of the next decade, excluding support for banks, compared with Mr Brown’s original objective of 40 per cent.

The Centre for Economics and Business Research expects the deficit to peak at £213bn in 2010 or about 15 per cent of GDP, and the debt ratio to exceed 100 per cent two years later. The chancellor’s own headline projections may not be directly comparable, as they are likely to take into account policy moves.

In fact, the debt ratio has historically been much higher – more than 200 per cent after the Napoleonic wars and again after the second world war – without the disasters predicted by prophets of doom. These prophets may point to the current Irish crisis as a contrary example.

This ignores the fact that 80 per cent of the Irish national debt is held by international investors, compared with 30-40 per cent in the case of the UK and the US. Moreover, Ireland has the disadvantage of being tied into the eurozone at a fixed exchange rate that was initially too low and is now too high.

Of course, it would have been much better if the UK could have entered the recession with much lower initial deficit and borrowing ratios – if only because the financial markets do not understand the very good arguments for fiscal deficits in depressed times. It is childish just to blame Gordon Brown. Economic forecasts are not made by the chancellor personally and the Treasury’s fiscal assumptions are endorsed by the National Audit Office.

These bodies are not free to write fiction. At a rough guess, I would put a third of the blame on an over-optimistic assessment of the underlying growth rate and amount of spare capacity in the economy, a third on an over-estimate of financial sector profits and perhaps a third on over-optimism by Mr Brown himself.

What fundamentally is wrong with a budget deficit? The basic argument is that if borrowing is too high the government can get into a debt trap, having to borrow more and more simply to pay the interest on past borrowings. Estimates of the safety limit tend towards an annual deficit of 3 per cent of GDP – the limit that is incorporated in the eurozone’s growth and stability pact.

Such calculations were perfectly all right before the credit crunch, when booms and busts were fluctuations around a given trend. Keynes in his General Theory maintained however that the propensity to save was much greater than the private propensity to invest, not just at the bottom of a recession but more or less permanently – a state known as secular stagnation.

This seemed plausible in the 1930s but was belied by events in the half century or so after the second world war. We could easily have a good few years in which secular stagnation might seem to prevail again, if only because of the near destruction of the world financial system. If we are in such a state then an attempt to adhere rigidly to a fiscal rule could lead to a permanent and unnecessary loss of output outweighing any welfare loss from the debt trap risk itself.

I have sympathy with those economists who favour a mainly monetary approach to sustaining demand. But I fear that the present dangers are great enough to require a belt and braces – monetary and fiscal – approach. I go back to an early suggestion of Milton Friedman that I disinterred in response to December’s pre-Budget stimulus.

The suggestion was that tax rates should be set to balance government spending at a hypothetical level of national income corresponding to “reasonably full employment at a pre-determined price level”. What this is cannot be estimated until the world and UK economies have settled down after the present turmoil.

But the beauty of the suggestion is that, should the economy go back to a recognisable trend growth rate, then the budget would automatically achieve the target balance. Yet should there really be secular stagnation then deficits would run on as long as necessary. Of course, a lot of work would need to be done to adapt Friedman’s suggestion to modern conditions, but this would be immensely more worthwhile than the hazardous projections we are likely to see in the Budget Red Book.

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