Economics

The two-edged stimulus Britain can’t afford

Britain’s economy is on the brink of recession after barely growing in the last year and it faces acute risks from the debt crisis in the eurozone, its biggest trading partner. Critics of the ruling coalition say budget restraint is to blame for the malaise but just how much spending has been cut?

Opposition leader Ed Miliband, suddenly concerned about the deficit, urged the government to change direction “for the sake of the country” last week. “Austerity at home, collective austerity abroad is no solution to the problems of jobs, growth or the deficit,” he said. To stir job creation, the socialist urged immediate stimulus measures, including tax cuts. Imagine that.

The reality is that Britain can’t afford it. Its deficit it still as big as Greece’s while government spending accounts for half of gross domestic product. Total public sector spending, in real terms, is almost 4 percent higher this year than it was in 2009, Labour’s final full year in power.

When the Conservatives and Liberal-Democrats engaged in a coalition last year, accountants at PricewaterhouseCoopers estimated that “Britain would have to make across the board budget cuts of 5 percent a year to come close to cutting the deficit in half by 2014.” They even assumed a slight economic upturn that’s unlikely to materialize due to Britain’s high energy costs and the spiraling debt crisis in Europe.

Prime Minister David Cameron recognizes that too often, government is what’s standing in the way between entrepreneurs and wealth growth. He has vowed to fight the “enemies of enterprise” and cut regulations but one out of five Britons is still employed by his government. The top income tax rate is 50 percent and the level of government debt, though ambiguous, is eye watering.

Officially, Britain’s debt stands at roughly 62 percent of GDP or nearly £1 trillion but that doesn’t include its huge pension liabilities. When factored in, according to the Treasury, Britain’s actual debt equals 173 percent of GDP. According to independent analysis, it could be double that number.

Meanwhile, the Bank of England has been injecting some £275 billion into the economy, corresponding to nearly 20 percent of GDP, in monetary stimulus. This policy David Cameron has explicitly endorsed. He ruled out fiscal stimulus this summer, saying that no country can afford it anymore. “They have all run out of money.” So the answer is printing more of it?

The only sensible policy is for the central bank to stop the printing presses—which not only undo the very modest pay increases that Britons still enjoy but exacerbate the credit dislocations that were at the heart of the financial crisis—and for the government to start cutting red tape as well as future pension commitments to simultaneously encourage private sector investment and shore up public sector finances.

That’s what austerity would look like. The half-hearted “conservative” policy that Britain has now is not enough.

This article was originally published at the Atlantic Sentinel.

7 comments to The two-edged stimulus Britain can’t afford

  • monster

    sorry to go slightly off post, but this is the second time I have received this email, and I cannot get my head around its apparent (and amusing) ‘logic’ – can anyone please help with an explanation??

    The Greek Bail Out

    It is a slow day in a little Greek Village. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day a rich German tourist is driving through the village, stops at the local hotel and lays a ¤100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the ¤100 note and runs next door to pay his debt to the butcher.

    The butcher takes the ¤100 note and runs down the street to repay his debt to the pig farmer.

    The pig farmer takes the ¤100 note and heads off to pay his bill at the supplier of feed and fuel.

    The guy at the Farmers’ Co-op takes the ¤100 note and runs to pay his drinks bill at the taverna.

    The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him “services” on credit.

    The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the ¤100 note.

    The hotel proprietor then places the ¤100 note back on the counter so the rich traveller will not suspect anything. At that moment the traveller comes down the stairs, picks up the ¤100 note, states that the rooms are not satisfactory, pockets the money, and leaves town. No one produced anything.

    No one earned anything. However, the whole village is now out of debt and looking to the future with a lot more optimism. And that, Ladies and Gentlemen, is how the bailout package works!
    !!!!!!!

  • monster

    Of course, each debtor is a creditor too!

    doh! silly me – well thanks for that pointer mrg, and a merry christmas to you!

  • Paul Marks

    Taxation is crushing – 50% income tax (for “the rich”), 20% national sales tax, a payroll (social security) tax (unlike New Zealand or Austrialia) and on and on….

    There is even a special BBC tax in Britain.

    Yet the fiscal deficit is indeed vast – because government spending is even higher than taxation.

    And on the monetary side?

    The Bank of England is acting like a drug pusher – offering everyone (for the banks to the stock market) “a fix”.

    The only rational advice one can give to young people (or people with marketable skills) is “get out of here”.

    Meanwhile most of the media (and academia) talk about “austerity Britain” as if David Cameron was Stanley Baldwin.

    It is insane – totally counter factual.

  • Paul Marks

    It is crazy, but it is also important.

    When present policies fail (which they will) it will not be wild “fiscal and monetary stimulus” that gets the blame (as it should). Because the wild monetary expansion (and the wild deficit spending) will be ignored – indeed more than ignored.

    FICTIONAL “fiscal conservativism” and “tight money” will get the blame.

    One can already see the Keynesian economicts (and their brainless lapdogs in the media – including in a lot of the “conservative” newspapers) setting this up.

  • [...] article also appeared at The Cobden Centre, November 26, [...]