13 Mar 2010

The Lib Dems, the deficit and a possible hung parliament

Nick Clegg may have blown open the key debate on the deficit in this election.

In or out of government, he says, he will not back the “economic masochism” of starting fiscal retrenchment this year. This happens to be one of the few areas of clear blue water between Labour and Conservatives going in to the election.

Labour have vowed not to begin cuts in earnest until next year. Conservatives have repeatedly made a point of the need to start now with an emergency budget before July, though there have been rhetorical differences of emphasis on the extent of these cuts from George Osborne and David Cameron.

There are three significant factors about this possibly inadvertent intervention.

Firstly, in his interview with Krishnan, Nick Clegg put a number on this fiscal policy – zero – saying there should be no cuts this year.

Second, as things stand in the polls, there will be no deficit reduction in 2010. A hung parliament with the Conservatives as the largest party would either have to abandon 2010 deficit reduction, or Nick Clegg has not ruled out a deal with Labour.

A minority Conservative government would surely struggle to get its emergency budget through parliament.

Lastly, the hung parliament debate is not what Nick Clegg wants to spend his time chatting about. He says the position on the timing of deficit reduction is his own, and he also has criticisms of the “economic foolishness” of Mr Brown.

It’s worth noting that of all the main parties the Lib Dem position on fiscal policy seems closest to the recommendations of the respected Institute for Fiscal Studies’ Green Budget, and that of the CBI.

Nonetheless it’s the implications for messy compromises in the first and second weeks of May that will be being watched carefully on the markets.