Stuck in a deflationary spiral

By Ann Pettifor
March 25, 2010

What do yesterday's announcements mean in terms of tackling the economic crisis, its main victims, and the climate change challenge? Here is my more or less immediate response to Alistair Darling’s final budget.


This was a politically skilful budget. Alistair Darling faced the problem of the ongoing deflation of an economy de-leveraging its debt in unseemly haste and dragging down economic activity, prices, profits, incomes and jobs as it does so. He also had to tackle the substantial decline in full-time employment over the course of the recession, only partly offset by increases in part-time employment. Thirdly, he had to counter the threat to Britain’s long-term energy and climate security.

He needed to deal with these threats by investing in a Green New Deal – a huge package of public investment to create at least a million jobs a year and de-carbonise our economy. This level of public spending would compensate for the collapse in private investment and stop the deflationary spiral.

He got off on the right foot by pointing to the £11 billion fall in borrowing which is a direct result of the mini fiscal stimulus of last year. The improvement has come from tax receipts and the stimulus measures adopted, including the cut in VAT and not from employment taxes. This demonstrates that taxes are the key to the deficit and that stimulus works in reducing it. The remainder of the £11 billion improvement has come from lower-than-anticipated gilt yields. So much for the theory that cuts are needed to reassure financial markets.

With those numbers, Darling has seen off the deficit hawks in the Conservative party, the Institute of Fiscal Studies, the City and the BBC. He has been proved right: a little fiscal stimulus staved off even higher unemployment and bankruptcies and helped stabilise the economy. Above all, he has proved, unequivocally, that government spending pays for itself.

But instead of using these numbers, and this proof, as a springboard for an even greater stimulus, the chancellor came over all optimistic. He promised economic growth and began the process of fiercely turning down the public spending screw, and with it real wages.

Public sector net investment will fall from £50 billion in the current year to £39.5 billion in 2010/11. At a time when total investment in the economy has fallen by £46 billion, and private sector investment fell again in the fourth quarter, this will serve to increase the spin on the downward deflationary spiral. Furthermore, given Britain’s balance of payments challenge, this collapse of investment will damage our ability to pay for imports, and lead to further currency crises.

To tackle the threat of energy and climate insecurity, we are offered the promise of a new bank – a “green investment bank” – with taxpayers providing £1 billion of equity and the City of London promising to match that sum. In other words, the City is offered a sweetener to participate in yet another subsidised bank, where it will no doubt be free to offer loans at unpayable rates of interest to budding entrepreneurs keen to manufacture wind turbines.

But Darling’s budget fails to stall the deflationary spiral. It could come back to haunt him.

© Ann Pettifor is a political economist, author and analyst of the global financial system. She writes regularly at - from which this budget response is adapted with grateful acknowledgements. Her Ekklesia blog is here: Ann is co-author of the Green New Deal ( She predicted an Anglo-American debt-deflationary crisis back in 2003, and is known for her work on sovereign debt and international finance, including Jubilee 2000. Ann is currently a fellow of the New Economics Foundation (, director of Advocacy International (, and campaigns director of Christian climate change campaign Operation Noah (

Although the views expressed in this article do not necessarily represent the views of Ekklesia, the article may reflect Ekklesia's values. If you use Ekklesia's news briefings please consider making a donation to sponsor Ekklesia's work here.