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George Osborne 's horror stories about the national debt cover for the ideology of reductions that threaten economy

Politicians on the right love to scare us. George Osborne, in his Mansion House speech cited "fears" over government solvency and sovereign debt crises. David Cameron has declared the fiscal deficit a "threat" to "our whole way of life," and "a clear and present danger to the British economy". This is nonsense. The threat we face is ideologically driven cuts that risk causing a double-dip recession.

Incidentally, this is not Keynesianism: it 's only accounting, familiar to all of macroeconomics.

The fiscal deficit adds to the stock of government debt owed to us, and it is true that we do not want that debt to grow as a proportion of GDP forever. But relative to GDP, the stock of national debt in the UK remains below that of the US, France and Germany. And when the economy starts to recover, the deficit will decline in any case, as investment and tax receipts rise. Household saving will also decline with time from its current high rate: saving rose because we became so indebted during the boom years, running down our savings and buying goods on credit. Having built up so much debt we now want to pay some of it off. But once we have paid off enough of that debt, our saving rate can decline and private spending pick up, further helping reduce the deficit.

What of the argument that the fiscal deficit crowds out private investment? This can only happen if the fiscal deficit pushes up interest rates, making investment more expensive. When the economy is doing well, this can certainly happen. But we have a fiscal deficit precisely because the private sector doesn't want to invest as much as we want to save, whatever the interest rate â€" which remains extremely low. The government still faces nominal interest rates of only 3.5% on 10-year bonds because we the people are demanding these bonds â€" ie, we are demanding the fiscal deficit so that we can save.

What, then, of Osborne's complaint in his Mansion House speech about "annual debt interest payments that will soon exceed what we spend on schools"? Is this a "terrible, terrible waste of money", as Cameron has called it, taking money from our schools and hospitals? No. The vast majority of those interest payments are going back to us, the people, who lent the money to the government in the first place â€" since only 20% of UK public debt is held by foreigners (one of our major differences with Greece) . Cameron's claim that "for every single pound you pay in tax, 10p would be spent on interest" is frankly dishonest: 8p of the 10p is cashback for us! If we, as a democracy, decide that we are not spending enough on schools and hospitals, we can simply have the government tax the equivalent of that interest back again.

This reveals the underlying reason why politicians on the right really want to reduce the deficit: expenditure cuts today imply tax cuts and smaller government in the long run. And once we see that the fiscal deficit is our saving with the government, it becomes obvious that Cameron and Osborne's claim that the deficit has us "living beyond our means" is nonsense. Any politician who cares more about public services than tax cuts should be relaxed about a few years of fiscal deficits.