The cuts agenda could put at risk the work any decent council should be most about – creating social cohesion and economic prosperity at the heart of our communities, says Dan Corry.

Imagine two possible approaches to tackling the situation the world economy is in.

The first says that the only way to get the confidence of the financial markets back is for everyone to cut spending like mad in an urgent attempt to reduce their deficits.

The second says that the real problem we have is very low growth in many countries that is making deficits rise; so the solution is not to cut too severely now but to urgently look for ways to boost the economy.

If you could get away with it I suspect many people would buy the second scenario here. The trouble with the first is that it is hard to see how it gets growth going in the next few years. Everyone of course wants to export their way to growth – but who do you export to if everyone is cutting back? China and Germany are the two economies still doing well – but they tend to export themselves, not import from others.

Yet it is the first strategy that the world is now following – with a vengeance. The answer to deficits and slow growth is deemed to be austerity all round.

Why have we ended here? Partly due to ideology – both beliefs about economics and deficits but also about the public sector and public spending – and partly due to the fearsome power of the financial markets, who, it is assumed, dislike anything other than hair shirt policies and are currently ruling the waves.

It is also however due to a lack of political leadership in the world: where is the Roosevelt for our times? Clearly, if countries coordinated their actions we could all do better than with each country going it alone.

The London G20 Summit of April 2009 was a success in that respect. Bullied by Gordon Brown, world leaders agreed that we really were all in it together and decided on radical measures that played an important part in helping steer the world economy away from the feared repeat of the Great Depression.

Unfortunately that burst of global leadership is not now being repeated. Our own Prime Minister acts like a disinterested bystander, secure in the belief that Britain is a ‘safe haven’ as markets swirl around.

For various, mainly domestic, reasons neither President Obama nor Chancellor Merkel are able to play a lead role – even were they up to it. And the emerging power players like China are not quite ready to assume leadership positions.

The second approach is often criticised with the use of the adjective ‘Keynesian’ – those who argue for it are mocked as having no interest in the size of the deficit and believing that government action can trump sound financial management.

But there are many variants of a less austerity focused approach that are fiscally responsible – like loosening a bit now in return for more tightening in a few years time when the economy is stronger (an option perhaps rejected by the Coalition because it does not fit the political cycle very well).

But when people like the ‘Dr Doom’ of the economics profession, US Professor Nouriel Roubini, argue for this, recently saying in the FT that ‘The best bet is for those countries that have not lost market access – the US, UK, Japan, and Germany – to introduce new short-term fiscal stimulus while committing to medium-term fiscal austerity’, it is clear this is not just the call of naive pro-big state voices.

We may get elements of strategy two if we get some more Quantative Easing from the Bank of England. But relying on monetary policy is hard when interest rates are already low, banks reluctant to lend and businesses scared of investing. As Keynes’ biographer Robert Skidelsy has argued, maybe this is the time for more dirigiste approaches with the state directly investing in infrastructure and other measures.

Back to the real world of local government, things look pretty tough. If anyone thought the economic situation would be short lived they are having to revise quickly. And to add to the cuts agenda we now have the danger of riots and looting striking at the heart of our communities, and putting at risk what any decent council should be about most – creating social cohesion and economic prosperity.

There will be many debates as to the causes of the unrest and they will not be simple. But their existence and the possibility of more only add to the problems. Creating decent communities is hard in any case but the current circumstances make it harder. Cuts to services, including the police and youth services, cannot help; an economy that is flat as a pancake is a problem; and a government whose first instinct is too often to denigrate locally elected councillors does not make it easy to create a sense of local community.

We are likely to see some difficult months for the economy and some tough years for local government. A bit less of the austerity-mania now would help all round.

Dan Corry works at FTI and is a former Treasury & Downing Street advisor.