Grahame Smith: Our new leaders need to reduce UK deficit with growth not cuts

I WRITE before the dust has settled on the coalition deal between the Tories and Lib Dems. But the early signs are ominous.

The UK economy is struggling with high unemployment and low internal demand; the global economic outlook remains highly uncertain despite the eurozone bailout; serious problems continue with the availability and cost of credit and there has only been the merest whiff of serious structural reform post-banking crisis.

And how does the new government intend to embed the fragile recovery? By buying a ticket to the deleveraging party which has been in full swing since the global financial crisis forced households and firms to reconsider their finances. Workers across the Scottish economy, in public, private and voluntary sectors, should be in no doubt that the immediate and deep cuts proposed by the new government will have a devastating impact. If not a double dip, then the best we can hope for is a prolonged period of Japanese-style deflation.

The Liberal Democrats appear to have forgotten that, by an overwhelming majority, the electorate voted for parties opposed to cuts this year. Their Cabinet seats and promise of electoral reform will be no consolation to the hundreds of thousands of workers who will lose their jobs if these cuts go ahead, not to mention the impact on some of the most vulnerable in our society who depend on public services.

The galling thing about these cuts is that market prices do not suggest (they never did) that the UK economy is on the verge of a credit downgrade or worse. If the Cassandras were correct, Tuesday's gilt auction, oversubscribed at a decent price, simply couldn't have happened. The stubborn refusal of prices to conform to the portentous narratives of those on the political right has been a defining feature of the election campaign.

Compounding the withdrawal of fiscal and monetary stimulus with spending cuts on the basis of highly dubious analysis of market information hardly suggests that Messrs Cameron and Clegg (incidentally, only one woman in the Cabinet?) are committed to evidence-based policymaking.

I can only hope that the penny drops with the new government that increasing growth and employment is the only sustainable way to reduce the deficit. Fixing the UK's banking and financial system is a prerequisite. Reinvigorating manufacturing through a judicious use of policy instruments to embed and extend comparative advantage is also essential. A just and smooth transition to the low carbon economy will help maximise economic and employment opportunities in Scotland's emerging environmental industries.

More problematic for the new government will be addressing the demand deficit that played such a prominent role in creating the conditions for the financial crisis. The careful nurturing of the equalising institutions that mitigate the tendency of capitalism to produce extremes of wealth and income is required for a fairer, more sustainable distribution of rewards across society. However, there is little sign that trade union rights, genuinely progressive taxation or living wages will be attractive to the new government.

The STUC congratulates Danny Alexander on his appointment as Secretary of State for Scotland. I will be seeking an early meeting with Danny to discuss the impact of spending cuts on the Scottish economy and how the new government proposes to get people back into work.

• Grahame Smith is general secretary of the STUC.