However, the timing, scale and nature of the cuts – and to what extent they need to be supplemented by revenue-raising measures (asset sales and/or tax rises) – are still highly debatable.

I personally believe that at least 80% of the fiscal repair work ought to be on the spending side, with up to 20% coming from higher revenues (not necessarily tax RATES – in fact in some cases where there is a realistic prospect of raising revenue by cutting rates this should be considered).

I also think the fiscal tightening pencilled-in by the government is likely to be insufficient, and is certainly imprudent given the scale of the problem.

In terms of the nature of the cuts, you’ve made some sensible suggestions but I do not think economies of one form or another (eg scrapping quangos, RDAs, SHAs etc) will be enough: bureaucracy has a habit of reappearing in new forms, and this empire-building will continue until the culture and incentives that foster it change. Previous attempts at realising efficiency savings from the centre have invariably had disappointing results.

Nor will programme cuts on easy targets like ID cards and Trident do much to reduce the government’s annual overdraft.

To be credible, politicians will have to grasp the nettle on issues like overhauling public sector pensions, the unnecessarily wide scope of tax credits and raising the retirement age across the board.

The question of the timing of the cuts is more problematic in my view. You can certainly argue that it is politically convenient and morally indefensible to defer the ‘pain’ until after the general election.

But it may just be economically justified given the continued fragility of the economy.

Whatever you think of the effectiveness of the recent ‘fiscal stimulus’ (which, let’s face it, was puny both by international standards and in comparison to the UK monetary stimulus), I’m not sure an aggressively pro-cyclical fiscal policy is the answer.

I still think the sensible approach is to aim for balanced budgets over an economic cycle, allowing for cyclical swings into surplus and deficit.

The big problem about Gordon Brown’s fiscal policy in 2001-08 was not that it was too Keynesian but that he ran big deficits while the economy was booming – ie it was pro-cyclical rather than counter-cyclical. The ‘automatic stabilisers’ were not working but were being subverted by excessive spending that was not covered by revenue (and much of the revenue that did come flooding in was fuelled by the overheated financial sector and housing market).

The problem with trying to correct the huge structural deficit while the economy is still on its knees is simply that it may well turn out to be counter-productive.

If lower public spending does not free up resources for the private sector, but simply depresses aggregate demand, the resulting higher unemployment will wreck the fiscal arithmetic as well as delaying the recovery.

I’m not saying this definitely will happen; there are other possible scenarios. But it is clearly a danger.

For that reason I would prefer a phasing-in of the cuts so that they become progressively larger as the economy recovers. This was the approach that was successfully adopted in 1993-95 (albeit with tax increases playing a bigger role that time).

Of course it is essential to keep the confidence of the markets. But the key to this is the credibility of the long-term fiscal strategy, not whether the cuts begin today or in 6 months’ time.

You claim: “History shows that in the past the Labour IMF cuts, the Conservative 1981 budget, and the Conservative strict controls on public spending in the late 1990s were all important parts of the recovery process. Far from preventing recovery, controlling the public budgets aided the recovery.”

I’m not convinced about the cause and effect here.

For starters, one key difference in 1975-76 and 1981 was the need to rein in runaway inflation as the precondition for any durable recovery. That clearly doesn’t apply this time, though inflation may re-emerge as a danger in future.

Secondly, the 1981 budget was a clever foil designed to facilitate lower interest rates and exchange rate without giving the markets the idea that the government was going soft on inflation. So while fiscal policy was tightened sharply, monetary policy was eased over the following years and a large devaluation in sterling fuelled the recovery in the mid-1980s. There is clearly little scope for a further monetary stimulus this time to offset a fiscal clawback.

The other point is that the means of fiscal tightening adopted in the 1981 budget was across-the-board direct and indirect tax increases – and indirect tax increases also played a big role in the 1993-97 fiscal consolidation. So, logically, if you believe fiscal policy at these times actually aided the recovery then you believe that tax increases, as well as spending cuts, can be introduced in the trough of a recession without fear of deepening it. I’m not so confident…

The reality is that in 1993-2000 (perhaps the most successful recent example of how to correct a deficit), the spending controls and tax rises were largely deferred until the recovery was clearly underway. The main reason the economy recovered in 1993-95 was not fiscal policy, but the lower interest rates and devaluation that followed our exit from the ERM.

Clearly, the corollary of my argument that it’s best to delay spending cuts is that they need to be ambitious and sustained once they take effect, and spending may well have to be reduced in cash terms (not just as a proportion of GDP) even when the economy is growing at trend or above-trend rates. I suspect British politicians will find that quite a challenge…

I think I know who the Sheep are in this tale; and the Sheepdogs; but, I am not sure who the Wolves are! Is Mandy a wolf?

http://www.aesopfables.com/cgi/aesop1.cgi?4&TheWolvesandtheSheepdogs

We saw you on South Today this evening- just caught the end of your interview. Is it true that the meeting you attended should have had a better showing of fellow MPs?

Where were they all?

Reply:Most didn’t bother – see today’s blog

But apparently (according to its website) “performance, efficiency and effectiveness will be scrutinised closely by both government and stakeholders”. Yeah, right.

If he were a working cocker spaniel , I would say his pedigree was impeccable- spanning a very good line over many generations. I would say that if he were in a field trial I would comment that he was a neat mover and VERY capable of producing the best in the line up. He has a good nose and a wonderful ability to sense and scent when to be patient and bide his time, but equally able of working the cover and showing style to the very best of his ability.

The very best of his ability and his style?

He is working for himself, and not even looking towards his master or responding to the whistle or hand signals for direction.

Like most dominant dogs, he is being pack leader- Now, I am not a bit happy with this situation.

Who on earth is in control, Mr Mandelson or Mr Brown.

All we established this morning is that Mandelson is prepared to offer almost any placation or promise in the run up to the 2010 election whilst meticulously avoiding any actual commitments or detail or even a sense of urgency. It’s more “trust us despite our record” stuff from Labour again. With the economy in the state it’s in and the private sector bearing the entire impact of the credit crunch, this snake of a man talks in his cut glass accent of “not ruling anything out” but not until after the election. Yeah right pal – are we expected to be that stupid?

But therein lies the point. Labour is counting on the fact that there are enough people out there who are stupid enough to believe this drivel, or are so dependant on the state that they are voting to save thier free benefits or public sector jobs, or have ignorantly convinced themselves that the well of plenty is indeed bottomless and that debt repayments will not hurt, or that it can lumbered onto the “stinking rich”

Labour has failed to manage it’s affairs during the good times (if indeed they were genuinely good) and it’s response to economic failure is simply to take out more Credit Cards. Labour is the Kerry Katona of politics; no talent, no dignity, no skill and almost bankrupt.

The only thing that seems to be certain is that those at the heart of the New Labour project, be that Blair, Mandelson, the cabinet or the Grandees of the Union movement like Derek Simpson will have (looked afetr themselves-ed)whilst the rest of us are forced to face the wreckage they have created.

Today it is reported that Mr Hutton will be appointed to nuclear power company EDF’s Stakeholder Advisory Panel, which advises the firm’s senior management, and includes Lord Patten, the former Tory Cabinet Minister and last Governor of Hong Kong. It’s called the ‘revolving door. The Public Administration Committee (PASC) gave Richard Caborn and Lord Warner a roasting (see Quentin Letts’ hilarious account of the grilling)about taking vast sums in exchange for their ministerial contacts and ‘expertise.’ We pointed out in our report that Ministers settling contracts might have an eye on the possibility of a fat salary when they step down as ministers. We thought that there is a grave danger that contracts could be awarded for the wrong reasons. We made a major point of this peril in our report. My conviction is that ministers should be banned for life from working in companies that have received contracts from them in their ministerial incarnations. The contract that John Hutton bestowed of EDF was for £13 billion.

Reply: No, I don’t think so.