The first Thatcher government of 1979-83 had not been in power for long before I received a call from the office of a senior cabinet minister inviting me for a drink. Over a gin and tonic he came straight to the point: "What on earth is this government up to?". Not long after, two other ministers suggested to me that I should embark on the book that became Mrs Thatcher's Economic Experiment. I asked one of them why he didn't do it himself. "I can't possibly. I'm still in the cabinet, trying to mitigate the damage," he said.

Deja vu is the illusion of having experienced something before when in fact one is experiencing it for the first time. I do not have a sense of deja vu about the coalition government's obsession with cuts because, in common with the rest of my generation, I have experienced this kind of thing before – under what became known as Thatcherism, in the 1980s.

I was an early, and at times rather lonely, critic of Thatcherism in general and the specific economic doctrine to which the first Thatcher government was attached, namely monetarism. Then the obsession was with defeating both inflation and the trades unions. The two were connected, because the unions were considered the main culprits when it came to the UK's addiction to what was known as "the inflationary spiral".

Now the obsession of what increasingly seems like a born-again Thatcher government is with the budget deficit rather than inflation or the trades unions. True, as a result of the massive devaluation of sterling in the past few years, inflation has crept up slightly. But it is still at a historically low level and the main concern of both the Bank of England here and the Federal Reserve across the Atlantic has been fear of deflation, or falling prices.

But back to my meeting with that senior cabinet minister. He did have concerns about inflation and he was worried about the unions. But what he objected to was the way the government was going about it and the social damage that was likely to result.

Parallels



There are parallels between then and now, because most people are concerned about the deficit – but it is the way the coalition is going about it that alarms commentators such as myself.

And I am not alone. Paul Krugman, a Nobel laureate in economics, has been railing against "deficit hysteria" in the New York Times. In a recent editorial which was generous to our prime minister over his response to the Saville report on Bloody Sunday and his promise to investigate the role of our security services in "extraordinary rendition", the New York Times nevertheless wrote of "a dark shadow over these early good works: the needlessly draconian emergency budget that the chancellor of the exchequer, George Osborne, unveiled".

It continued: "Some cutbacks were necessary. But the budget aims to cut too much too soon. Its real achievements are more likely to be drastically downsized public services and, if the fiscal austerity backfires, as it well might, a contribution to years of stagnation."

Again, in the Financial Times, Sir Samuel Brittan and Martin Wolf, two commentators not known for being soft on inflation or dovish with regard to public spending, have been vociferous in their concerns about premature cuts in the deficit and the dangers of prolonged stagnation. Recently, the FT devoted its main editorial pages for the better part of a week to a debate which reached a climax when, in a veritable tour de force, Keynes's biographer Robert Skidelsky and former Treasury official Michael Kennedy challenged the view of European Central Bank president Jean-Claude Trichet that cuts were needed to restore confidence. They quoted the powerful words of Keynes himself in 1937: "The boom, not the slump, is the right time for austerity at the Treasury."

Few observers question that the coalition should be aiming to balance the budget in the medium term – a goal shared by the former chancellor, Alistair Darling. The worry is that premature fiscal tightening (via cuts in public spending and increases in VAT) will at the very least hinder the pace and scope of economic recovery and at worst could plunge the economy back into recession.

As it is, the economy is operating way below capacity, with very high levels of unemployment, yet the government is almost exulting in the way it plans to cut back public services – and hence public sector employment.

Given that so many private sector firms depend on orders from the public sector, this is likely to have multiplier effects throughout the economy.

A myth has been propagated within the coalition that its scorched-earth policy is justified because of the way the 364 economists who collectively objected to a similar approach in the early 1980s were proved wrong.

The 364 had written to the Times arguing that Sir Geoffrey Howe's deficit-cutting budget of 1981 would prevent an economic recovery. What they did not know at the time was that a secret decision had been taken to relax monetary policy and engineer a devaluation of the pound. Thus the budget strategy was less restrictive than it appeared. Even so, unemployment went on rising until 1986.

When I remonstrated with Howe about his obsession with cutting the deficit during a recession, he replied that he was "an old-fashioned Welsh fundamentalist" and believed in cutting the deficit "come what may".

We at the Observer invited Professor JK Galbraith to comment in 1980 on the new government's approach and he wrote that "Britain has, in effect, volunteered to be the Friedmanite guinea pig … There could be no better choice … Neither Englishman, Scots nor even the Welsh take readily to the streets … British phlegm is a good antidote for anger; but so is an adequate system of unemployment insurance."

We invited Milton Friedman to reply to Galbraith's attack on the monetarist approach and, to our surprise, Friedman gave us a scoop by saying he did not have the time to write for us but that, if it was any help, he was enclosing some evidence he was submitting to a House of Commons committee. In this submission, even Friedman, while adhering to his belief that to control inflation one had to control the money supply, attacked the Thatcher government for cutting the deficit at a time of recession.

As it turned out, controlling the money supply was more difficult than Friedman and his followers believed, but it was easy to bring inflation down if you allowed unemployment to rise high enough. One of the obsessions of the coalition now is to cut welfare payments in general and invalidity benefit in particular. Yet, ironically, it was the Thatcher government that largely created the so-called dependency culture by deliberately encouraging employment exchanges to direct people towards invalidity benefit in order to massage the unemployment figures.

It is wiser, and easier, to reform a welfare system at a time of economic expansion rather than stagnation. True, the statistics for the second quarter showed a superficially impressive rise in gross domestic product – 4.5% at an annualised rate – but not even the most parti pris forecaster believes this rate – reflecting both the impact of the stimulus and a burst of corporate "restocking" – can be maintained.

Most forecasts indicate an anaemic recovery, probably insufficient to prevent further rises in unemployment, a process to which the "emergency" budget has imparted added impetus.

To use a technical term, the British economy, in common with many others, is experiencing what economists call a "growth recession". The tenuous signs of recovery in the first quarter of this year were attributable largely to public expenditure – the very area where the coalition plans to cut back.

In the 1980s I coined the term "sado-monetarism" for what was being inflicted on the economy. In the current climate I am more inclined to speak of "fiscal masochism".

There is always scope to eliminate waste and improve productivity. But both in the early 1980s and now, I fear a powerful motive for the deficit cutters is an old-fashioned rightwing dislike of public spending and welfare per se.

The theoretical justification for the attack on public spending in the early 1980s was the putative link between public sector borrowing and inflation, via the impact on the money supply. But, as we have seen, even Friedman, the apostle of monetarism, acknowledged the stabilising influence of public sector deficits in time of recession.

Now, with inflation negligible and the unions long since emasculated, the theoretical justification for the obsession with deficits is the supposed difficulty of financing them. But, as figures in the latest annual report of the Bank for International Settlements show, the UK is top of the league when it comes to the length of time before its debt has to be refinanced, with the average maturity of its debt at 14 years, compared with under nine years for the US and Germany.

Non-residents hold 70% of Greek government debt, just under 50% of US government debt and less than 30% of UK government debt. The idea that our situation is in any way comparable to that of Greece, as George Osborne has repeatedly suggested, is preposterous.

Keynes himself believed in a long-term policy of balancing the books. But he made a crucial distinction between the right approach for a household in financial trouble and for an entire country.

The natural inclination for a household in trouble is to cut back. But if everybody in the country does so, there is a dangerous downward spiral.

A government that raises taxes and cuts spending at such a time only compounds the problem. But I fear that is what the coalition is in danger of doing.