How we tackle the deficit matters to all of us - economists in war of letters

I've just come back from a City meeting on the UK economy and government policy so was already thinking about government deficits and their impact on people when I read the two letters to be published in Friday's Financial Times.

Twenty economists wrote to the Sunday Times this week taking the government to task for not cutting the debt more quickly.  Now, a further 60 economists have written to the FT saying the first twenty got it wrong.  The sixty are right.

Both letters are worth reading.  One of the letters is linked to Lord Skidelsky, author of the definitive biography of Keynes.  It stresses that the economy is not yet on a sustainable growth path and if growth was hit by tougher measures to cut public debt we would be in a worse position.  People may be worried about the financial markets but markets might be even more concerned about an economy that is going back into deep recession (which means lower tax revenues, higher spending, and higher debt).  A credible deficit reduction plan is essential but growth is what will save the economy.

There is also a letter by Lord Layard and others.  It points out that the deficit is sustainable (and has been higher many times in the past) and makes the point that if the government's contribution to demand was reduced next year even more than it will be, the recovery would be in danger, especially while unemployment is so high.  The economists writing to the Sunday Times were calling for more deficit cutting action now.  The letter points out that this would be dangerous.  What is needed is a debate about the detail of the government's plans for the medium term.

Most people don't realise that the UK is set to tighten fiscal policy significantly next year - in other words, the Chancellor has taken a prudent approach.  Few other countries are doing this.  The twenty economists writing in the Sunday Times were seen as backing Conservative economic policy (the latest version at least).  Yet such an ideological approach is risky.  This matters in terms of jobs and the futures of a generation (which is how long it will take to cut the debt back to pre-crisis levels, such was the impact of the banking crisis).  I am always wary when economists start talking about satisfying the bond market's demands.  Yes, the concerns of bond investors need to be heard.  But they can change their minds very quickly.  Government fiscal policy takes months or even years to change.

A chancellor has to make a judgement and be clear about what he or she is doing to deal with the problem.  There is no strong case to suggest Alistair Darling should be changing his economic policy, as I have argued.  The Sunday Times Twenty are reflecting an economic orthodoxy that did nothing to prevent, or help us escape from, the greatest financial crisis since 1929 and the deepest recession since the war.