Speaking to John Humphrys on the Today programme a few days ago (24 June), Nick Clegg sounded particularly uncomfortable dealing with the verdict of the Institute of Fiscal Studies that the budget would hit the poor harder than the rich.

But Clegg's economic illiteracy revealed itself most clearly when he declared that the budget pain was absolutely necessary. In its absence, said Clegg, Britain would be paying £7bn per annum in debt service, a sum which would place an intolerable and unfair burden on our children for a generation.

I shan't quibble about the fact that £7bn is only half of one percent of current GDP, and that the austerity caused by this budget will on the Government's own reckoning reduce potential output growth by more than this. Indeed, according to David Blanchflower, the cuts will almost certainly bring about a double dip recession next year. The key question is whether running public sector deficit places a burden on future generations?

Nick Clegg repeatedly referred to the Greek debt crisis as an example of what might happen if we fail to make cuts. However, it is vital to understand that Britain is not like Greece in two important respects. First, the UK retains its own currency and Central Bank and thus the power to set interest rates, influence the exchange rate and so on. Secondly---and this is the key point---most public borrowing takes place within the UK, which has a large domestic secondary market for government bonds and other financial instruments.

When the UK Treasury borrows money, it sells bonds to the non-bank public; ie, to you and me. Such bonds appear on the government's books as a liability but on our books as an asset. Far from burdening our children with debt, when we (or our pension fund managers) buy government bonds, we are acquiring an asset which can be passed on to our children---plus the income stream which the asset pays out. Clegg's answer would certainly not get him through an undergraduate economics exam.

Of course, other conservative (with a small ‘c') politicians usually produce somewhat more sophisticated answers. For example, George Osborne regularly argues that increased government borrowing will drive up interest rates, thus ‘crowding out' private investment. This argument fails on two counts. Under present circumstances, the Bank of England can keep medium and long term interest rates down through quantitative easing, as indeed it has done in the recent past. But even allowing that borrowing raises interest rates, such a rise would need to lead to ‘full crowding out' for the argument to be correct. In economists' jargon, Britain's aggregate supply curve would need to be perfectly inelastic for full crowding out to occur.

Indeed, only a very few (and very conservative) economists believe that private sector investment is low because interest rates are too high. Most economists believe the opposite; namely, that the private sector is not investing because the effectiveness of interest rates is limited by the ‘liquidity trap'; in reality it is effective demand which is too low. As the case of Japan in the early 1990s shows clearly, even zero nominal interest rates cannot get an economy out of recession. What is needed in the sort of public spending which will ‘crowd in' private investment; ie, spending on new, better and greener economic and social infrastructure.

The ultimate refuge of the conservative politician is ‘Ah, but if we don't reign in public spending we will be attacked like Greece'. This argument has gained much traction in continental Europe, particularly on the centre-right in Germany. Again, the argument is hollow.

In the short term, the Greek crisis could have been avoided had the European Central Bank continued to buy Greek bonds regardless of their down-rating by the agencies. The very act of keeping the ECB window open would have greatly dampened speculative short selling, avoiding the disastrous fall in Greek bond prices. Most important, Britain is not Greece----its bond maturities are much longer that those of Greece and it hardly depends on foreign bond purchases. Indeed, because tax receipts have recently been rising, the Treasury has been able to cancel several planned bond auctions.

The real lesson of Clegg's ‘Today' interview is that although he may be ‘liberal to the core' as he insists, either his economic views are rooted in the orthodoxies of the post-Thatcher era, or he is playing the Merkel ‘frugal housewife' card for cynical political gain. Either way, the views he currently espouses on the budget do him little credit.

George Irvin