'Too far too fast' is the Labour party's new favourite phrase. Their argument is that the Coalition's spending cuts will condemn Britain to 'anemic' growth and high unemployment. The cuts even risk a double-dip recession, though even Ed Balls has had to concede how unlikely that is.
The argument is successful in so far as the cuts are now perceived to be a drag on growth. However, from an historical point of view a credible argument can be made that the economy is now emerging from recession because of the cuts rather than in spite of them.
In the early 1980s the Thatcher Government defied the Keynesian economic establishment by slashing spending in the teeth of recession. 364 economists, one for each day of the year (yes... they got that wrong too), signed a letter claiming that the Government's 1981 budget would condemn the economy to a self-perpetuating spiral of decline. What actually followed was eight years of uninterupted growth, averaging a robust 3.2% a year.
A 2010 study by Harvard economists looked at the consequences of fiscal consolidation for virtually all OECD economies since 1980. They suggest that austerity can be expansionary if actors believe that the fiscal tightening will avoid the need for a more severe tightening in the future. It also leads to lower interest rates, a surge in private investment, and increased exports. Within reason the larger and more decisive the tightening the greater the chance of success.
So, is history about to repeat itself? The Coalition's plans are certainly large and decisive (as opposed to the rather vague plans of the Opposition). The economy is responding how it should be. The 10-year gilt yield has fallen and compares well with other economies in a better fiscal position. Stocks have gained 20% and business investment is up 2.8% on the first quarter of 2010. The economy should grow at approximately 1.8% for the foreseeable future - less 'anemic' and more the UK's trend growth rate since the middle of the 19th Century.
There is, however, something missing. In the early 80s austerity was accompanied by improved incentives. George Osborne's reforms to Corporate Tax to make it one of the most competitive in the G20 is a good start but should be part of far-reaching and radical reforms to the tax regime. Reversing Labour's spiteful increase in the top rate of Income Tax would be a good target.
The coalition has to be unremittingly pro-business if it's to pull off the turnaround that the Thatcher Government managed. For business in the 1980s the penny suddenly dropped that here was a Government that was on its side. It led to an explosion of new business which reduced unemployment by one million and delivered a balanced budget by 1989.
This was dubbed an 'economic miracle', but there is nothing miraculous about it. The Coalition has made a textbook start, now they need to start talking less about austerity and more about prosperity.