Michael Dugher: Osborne is making the mistakes that could lead to a new great depression

In the 1930s, a global economic crisis quickly turned into a Great Depression thanks to the response from governments across the world. Nearly a century later, the same mistakes are being repeated with the Budget.

While being interviewed this week, my fellow Yorkshire MP, Ed Balls, quoted Keynes, who saw at first hand the mistakes of the 1930s. Keynes blamed "mad men in authority, listening to voices in the air" for introducing the kind of deflationary spending cuts that suppressed demand in the economy and sustained the slump. Keynes argued that when markets and the private sector fail, governments can use their power to increase demand, and thereby promote growth and jobs.

When you help industry and put people to work, the economy grows, tax revenues go up, benefit payments go down and the deficit is reduced. It's not rocket science when put that simply.

And you don't have to go back to the 1930s to hear similar views being expressed with authority today. Danny Blanchflower, a former member of the Bank of England's Monetary Policy Committee, has warned against too large a reduction in government spending at this time.

So too has the Obama Administration, with US Treasury Secretary Tim Geithner worried that G20 nations are risking a "double-dip recession" with plans to cut too much, too quickly.

Why does this matter here in Yorkshire? Because in areas like my own, in Barnsley, the recession has hit people particularly hard. Due to fundamental structural problems, such as low skills or the decline of major industries (like coal mining), disadvantaged areas like Barnsley and other parts of Yorkshire disproportionately suffer when times are tough.

They are often more reliant on the public sector as a provider of jobs and an engine of growth in the local economy. With the best will in the world, the private sector cannot meet all the demands for employment – there just aren't the vacancies.

The new coalition believes that government is always the problem and can never be a force for good in the economy. This is not logical – it is ideological. When the global financial crisis hit Britain, the previous Labour government had to act. It is easily forgotten that just before the financial crisis, even after a decade of massive, sustained investment in our public services, debt was actually lower in Britain than the level inherited from the previous Conservative Government in 1997. Labour firstly intervened to stop a complete collapse of the banking system. Then the government stepped in to support demand in the economy when private sector confidence drained away. And Labour was also determined to help mitigate against the impact of the recession on families and businesses.

In the end, we had a global financial crisis on the scale of 1929, but rather than a Great Depression, the consequences were far less severe than the recessions of the early 1980s and 1990s. By contrast, in its first few days, the new Government announced 6bn of additional cuts (additional to those reductions planned by Labour). This was followed by a further 2bn of cuts, including a refusal to support the loan to Sheffield Forgemasters, ending one-to-one tuition for children who fall behind, cutting university places, freezing the Building Schools for the Future project, and ending the Future Jobs Fund.

They are also completely counter-productive. Isn't it better for young people to be in work or getting an education or skill, rather than languishing on benefits? Doesn't it make more sense for construction workers to be building hospitals and new schools, and thereby paying taxes and spending money in the local economy, rather than sitting on the dole, disappearing into the black economy or leaving to go and work abroad instead?

And it is also quite unnecessary. The commentator Will Hutton has made clear that the former Labour government was already committed to a greater and faster reduction in the budget deficit than any British government in living memory. It was twice as tough as the much quoted cuts introduced by the Canadians in the mid-1990s (though they had a buoyant US market to help them – the UK's biggest market is Europe, where EU governments are also busy driving down demand).

Our cumulative national debt is not particularly large by international standards. The VAT increase will not only hurt the poorest, the unemployed and pensioners, but it will also dampen demand in the economy and hit retailers hard.

The coalition Government may have an almost Crucible-like hysteria when it comes to talking about – or rather talking down – the economy, but the truth is rather different. There were better-than-expected borrowing figures from the Office for National Statistics last Friday, thanks in part to Labour levying bankers' bonuses and due to lower-than-predicted unemployment. There is little pressure on interest rates – still at a record low of 0.5 per cent – and we have historically low inflation.

So if it isn't economics, it must be politics. And what price will be paid for it? George Osborne had lunch last week with former Conservative chancellors Ken Clarke, Nigel Lawson, Geoffrey Howe and Norman Lamont.

The latter, while being advised by a certain David Cameron, once said that unemployment was a price worth paying. It wasn't then and it isn't now.