First, a reminder of the history. In his 1981 Budget Geoffrey Howe tightened fiscal policy despite the recession. 364 economists (pdf) wrote to the Times warning that this would “deepen the depression.” But in fact the economy subsequently recovered.
So, could those economists criticizing today’s Tory plans be making a similar mistake?
Maybe not, because there’s (at least) one humungous difference, which is where today’s figures come in.
In 1980-81, the government removed restrictions on bank lending, such as the “corset”, reserve asset requirements and informal qualitative controls on personal lending. The lifting of these controls unleashed an enormous - unexpectedly so - pent-up demand for loans. So consumer credit growth (and mortgage lending) boomed.
Household borrowing therefore offset government saving, with the result that domestic demand recovered.
But things are different now. Today’s figures show that consumer credit is falling - households’ non-mortgage debt fell by 0.1% in the year to October.
Of course, it’s possible that this fall will be reversed next year, if consumer confidence improves or if banks become more willing to lend. But even so, there’s a huge contrast to 1981 in one respect. Back then, personal debt was equivalent to 18% of annual after-tax income. Today, it’s equivalent to 118.9%. On the most optimistic reading, this means there’s vastly less pent-up demand for debt. On the more pessimistic reading, it means consumer debt might continue to fall. And if households and governments both attempt to reduce debt, we can wave goodbye to the recovery.
However, you cut it, the chances of a fiscal tightening being accompanied by economic recovery are lower now than they were in 1981.
This doesn’t mean they are negligible - just that Tories can’t use 1981’s precedent as a justification for a fiscal squeeze.
* My chart shows the M4 measure of consumer credit, which is slightly different from the one in the Bank’s lending to individuals series, as this has a longer history. I’ve deflated this by RPIX inflation.