Don't Shoot the Messenger.

The Chancellor as he announces the results of the long-awaited spending review.

In his Play Henry IV, Shakespeare penned the phrase 'Don't shoot the messenger'. Without doubt George Osbourne and the Coalition will be forced to vociferously convince the Nation of this sentiment for years to come after the series of cuts announced on Wednesday.

In fact, in his speech Mr Osbourne did try to emphasise this message, and many of his other colleagues are now plugging the same party line: that they must 'confront the ghastly truth of Labour's legacy', as Liam Fox, Defence secretary, recently stated.

The simple graph below evidences the motives behind their campaign. The UK's deficit has ballooned recently, and at 10.1% of GDP in 2010, Britain has the largest budget deficit of any major economy globally. Only the United States comes close at 9.0%. However, why is this worrying, haven't we had budget deficits for years? We were fine then, right?

UK Fiscal Deficit as a percentage of GDP, including forecasted change in blue

Well, the IMF recently stated that: 'As economies gradually recover, it is now urgent to start putting in place measures to ensure that the increase in deficits and debts resulting from the crisis...does not lead to fiscal sustainability problems'. In other words, the IMF believes, and generally speaking so do other global institutions and economic powerhouses such as the IFS, OECD and others, that it is critical to the long-term prospects of the UK economy that it takes decisive action to substantially decrease the budget deficit. Fundamentally, this will increase confidence in the UK'e economy internationally, decrease interest payments and morally will not allow our over-exuberance become a hindrance on the lives of future generations.

However on the other hand there are many who feel that cutting back too soon is sure to, or is is far too likely to, cause a double-dip recession, or in the 'best-worst case scenario' to introduce stagflation to the economy. Stagflation is a period when inflation and unemployment are rising simultaneously, but both growth and demand are stagnating. This happened in Japan in the 1990's, and thus far Japan does not seem to have recovered from the long-term drain that it has had on the technological power's productive potential. Included in this camp of opposers are of course the Labour party, who, living up to their newly-found title of 'The Opposition' are digging into some good opposing by arguing for a much slower and gentler rate of deficit-reduction.

However, could the real idealogical battle to arise from these spending cuts be one of Keynes Vs. Hayek? Government intervention and demand Vs. the free-market system and conservative beliefs? Some more cynical commentators see these spending cuts as a landmark change of direction for the UK, similar to that experienced during the period of Margaret Thatcher and Ronald Reagan, only this time with a more Keynesian slanted US President. The notion of shrinking the public sector, cutting around 490,000 jobs from it in a few years, and expecting, or even hoping that the Private sector will pick up the slack could be viewed as an attempt to increase the poignancy of the free-market in the UK, by increasing the size and role that the Private sector has in the economy. A marked reverse from the ever-expansionary approach of New Labour? Maybe.

We cannot yet tell if ulterior motives are paying a part in these spending cuts, it will become evident with time, and surely with hindsight.

All we can be sure of however is what the Government would like us to think concerning it's actions. Whilst delivering his announcement George Osbourne stated: 'A fair Government deals with the deficit decisevely'. Is that really true? Can the cuts really be considered to be fair?