READERS of the Financial Times might have noticed the polite version of a ding-dong in the editorial pages this week. On Wednesday, chief economics commentator Martin Wolf wrote that "Britain's austerity is indefensible", while on Thursday, economics editor Chris Giles replied that "Osborne's strategy is too timid, not too austere". Given the very turbulent times, a degree of debate is understandable and, indeed, welcome; the FT does a service to its readers by showing the range of views. (The wide range of blogs at the Economist also reflects a diversity of opinion.)

Although the debate relates to the UK, I think it has a much wider resonance. And indeed, to a student of history, it has fascinating parallels; economic policy-making was rethought in the mid-1970s, but the same debates are popping up again.

First, a brief look at the data. In the fiscal year 2009-10, before the government came to office, current spending was £575.1 billion; last year it was £618.8 billion. The annualised figure for this year is heading for £630.7 billion. If we exclude interest payments and welfare benefits, spending in 2009-10 was £377.4 billion, last year was £389.4 billion and this year we are heading for £390.4 billion. For anyone who has worked in a private sector company, these would not count as aggressive cost-cutting measures; illustrating how difficult it is to cut public spending. In real terms, there has been a fall, but the chart accompanying Martin Wolf's piece illustrates the longer-term trend; in the past 30 years, there have been three periods where the government has managed to halt the rise of public spending in real terms (of which this is the latest) interspersed by two periods of a rapid increase. In the last 10 years that the Labour government held office, public spending rose 50% in real terms. It is hard to disagree with Chris Giles when he writes that

The origin of the unsustainable fiscal position was a pre-crisis delusion that buoyant tax revenues were there to stay

Now that a gap between revenues and expenditure has emerged, what is the answer? Spend more, say some, because austerity is self-defeating, hitting consumers' incomes and thus demand; Chris Giles pokes a large hole in that argument by pointing out that private consumption is in line with the expectations set in 2010 and that the big shortfall is in exports (despite sterling's 2007-08 depreciation). As he writes

To sustain the "austerity is the main cause of weakness" argument, you therefore really need to convince people that UK austerity somehow caused more pain to French, Spanish and German households, and hence to UK exporters, than it did to UK households directly. It did not.

The case that we have tried to make at the Economist, is that the government approached austerity in the wrong way, slashing capital spending. This is the easiest thing to do but in terms of stimulating the economy, capital spending delivers the biggest bang for the buck. More infrastructure and reforms in areas such as planning will boost the long-term growth rate, and create the hope that tax revenues will rise.

But while Chris Giles makes good points, it is worth returning to Martin Wolf's piece because as the doyen of British economic commentators, he tends to reflect and anticipate the intellectual trend. Perhaps the most remarkable section of the piece is where he criticises David Cameron for saying there is no "magic money tree". Martin writes

First, there is a money tree. It is called the Bank of England, which has created £375 billion to finance its asset purchases. Second, like other solvent institutions, governments can borrow. Third, markets deem the government solvent since they are willing to lend to it at the lowest rates in UK history.

This is interesting on many levels. First, on quantitative easing. Regular readers will know that I've not been keen although it can be argued that the first round of QE, when the financial sector was in collapse, was a desperate measure needed for desperate times. At the time, people argued that this was a temporary device, akin to central bank interventions in the money markets. Four years on, we have had more and more rounds of QE and more seems certain to follow. I vividly remember debating a member of the monetary policy committee who described me as a "conspiracy theorist" for thinking that QE amounted to central bank financing of the government. But when the FT's lead commentator describes the Bank of England as a "money tree" it is clear where we are heading; last year's speech on the need for helicopter money by Adair Turner was another signal. Recently, we have seen the Treasury take back from the Bank the interest it has accumulated on its gilts; interest it will need to offset the inevitable losses involved in buying gilts above par. This money has been deemed to "reduce" the deficit. As John Kay pointed out in another Wednesday FT piece

Why lose weight when you can reset the scales?

Getting central banks to finance a deficit is very tempting because it seems the politically painless option. But it is fundamentally dishonest as Margaret Thatcher spelt out 30 years ago. She complained that her ministerial colleagues were unwilling to raise the taxes to pay for the expenditure they had agreed so argued

Let us print the money instead. Because what that is saying is let us quietly steal a cerain amount from every pound saved in building societies, in national savings, from every person who has been thrifty

This is true even if printed money does not result in hyperinflation. As Stephen King of HSBC points out in his forthcoming book "When the Money Runs Out", central banks are now acting as redistributors of wealth, taking money from those with savings in the bank and giving it to the wealthy who invest in the stockmarket; making life harder for those who have saved for a pension, so not to be dependent on the state, and easier for those who have borrowed, regardless of their ability to pay. Or indeed, by letting inflation stay above target, by forcing down real wages. These are political decisions made by unelected bankers. Dylan Grice, the former SG strategist who is now a fund manager at Edelweiss, comments on this in his first newsletter at his new post. When money is created, it is easy to think that it is "free". But it can't be, or why would we bother to raise any tax at all; why not ask the central bank to pay for everything? If the central bank really did drop money from a helicopter, it would be grabbed by the most aggressive and agile people on the street, and not by little old ladies. The former would gain, the latter would lose.

We have a slightly better understanding of who pays; whoever is furthest away from the newly created money. And we have a better understanding of how they pay; though a reduction in their own spending power.

But back to the Wolf piece. Note how we leap from point 1 to point 3; the Bank of England has bought £375 billion of gilts and "the market" is willing to lend the government money at low rates. Going back to the data, the government has borrowed £409 billion in the last three financial years and another £72.8 billion so far this year; so the Bank has bought three-quarters of all issuance (admittedly in the secondary market, but the private sector must be influenced in its actions by the knowledge the Bank is a willing buyer). The private sector has only had to absorb a net £106.8 billion, or £27 billion a year. Presumably, the effect of BofE buying has been to force down yields or what was the point? Let us jump forward to, say, 2015 when the Bank might start to run down its purchases; if it did so over five years, that would be £75 billion a year. with the government probably still in deficit to the tune of £50 billion a year. the private sector would have to increase its net demand from £27 billion a year to £125 billion a year. Let us see what the markets demand in the way of yields to do so. (In my view, this is why QE won't be unwound in the foreseeable future.)

Back to the central argument. As Chris Giles points out, Britain's finances were in a terrible state when the government took office and the government could hardly do nothing. In 1976, when Britain was forced into the arms of the IMF, it had a smaller budget deficit and trade deficit than we did in 2009-10. It was a wake-up call for the then Labour PM, Jim Callaghan, who said

We used to think that you could spend your way out of recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a higher dose of inflation into the economy, followed by a higher level of unemployment as the next step.

Post-war British economic policy turned at this moment. The then chancellor Denis Healey even paid homage to some of the precepts of monetarism. The Labour party lost office in 1979 for 18 years and when it retuned in 1997 initially made much of its conversion to "prudence". Thirty seven years later, the same debate is being held all over again, just with a different cast. A Conservative prime minister is arguing that there must be a limit to deficit financing, just as a Labour prime minister did 37 years ago (it is not hard to imagine David Cameron making the Callaghan quote). Where there is a change is that Cameron appears to welcome the monetary financing of that deficit which his famous predecessor condemned 32 years ago.