1. Distinguish between two ideas: “cuts in government spending will weaken the economy, relative to what would otherwise be the case” vs. “Cuts will plunge the economy into recession.” The first is very plausible - Duncan is entirely right to cite Kalecki - but the second is less so: it’s possible that the economy’s baseline growth would have been sufficiently high that it can withstand tighter fiscal policy.
It would, to paraphrase Alan Budd, be mad to stake one’s reputation upon an economic forecast.
2. It is an accounting fact that reducing government borrowing requires that the private sector’s financial surplus falls. This in turn requires that the banking system be fixed, so people can borrow more easily. David Miliband was therefore right to stress the need for reforming the financial system - but he should have been more explicit that this must be a centrepiece of cutting the deficit.
3. The binding constraint on government borrowing is not the markets but inflation: the deficit can, in theory, be monetized. This doesn’t mean it should be fully monetized, as inflation might then bite. But it does mean we shouldn’t kowtow to the capricious gods of the market.
4. For now, neither the markets nor inflation require immediate cuts in the deficit. The government therefore has time to think about a sensible reduction plan, and to canvass ideas from people who are not mentally ill. This is all the more true because, as Don says, some “cuts” can turn out to be counter-productive. To the question: “what would you do about the deficit?”, Labour should answer: “We’ll think about it properly, which would be an improvement.”
5. The idea that top-down government can identify efficiency savings has already been discredited. Osborne’s first round of cuts - which should have been the low-hanging fruit of pure efficiency gains - included cuts of genuine services, such as university places. You can only achieve significant true efficiency gains by empowering workers, because it is only the boots on the ground who know where money is truly wasted. Such empowerment has the added virtue that it is the only way to avoid spending cuts becoming class war within the public sector.
6. There’s more room for tax rises than generally realized. As Martin Wolf points out, land tax has much to be said for it.
7. Macroeconomic policy on its own cannot achieve full employment (though it can prevent it!). Perhaps even - to cite Kalecki again - sustained full employment is impossible under capitalism. We shouldn’t, then, invest too much in macro policy.
Note for pedantic right-wingers; by cuts, I mean less government spending than would otherwise have been the case.