Britain Needs a Bolder Austerity Agenda for Growth
For all the talk of “reckless” spending cuts, the British state is still the greatest impediment to job creation.
Britain’s economy contracted mildly in the final quarter of last year and is expected to shrink again in the first three months of 2012. Critics of the ruling liberal-conservative alliance blame austerity for the lack of growth but this is false. The fact is that London has hardly begun to cut spending.
Prime Minister David Cameron and his chancellor, George Osborne, insist that Britain can’t borrow its way out of debt crisis but they are trying to do just that.
Total public-sector spending, in real terms, was almost 4 percent higher last year than it was in 2009, Labour’s final full year in power. It is projected to grow further this year, necessitating some £120 billion in borrowing and raising the nation’s debt to the equivalent of 62 percent of annual economic output.
The government has pinned its hopes on the Bank of England which has injected roughly £275 billion into the economy, corresponding to nearly 20 percent of gross domestic product.
Cameron supports the policy. He ruled out fiscal stimulus last summer, saying that no country can afford it anymore. “They have all run out of money.” But creating money out of thin air is just fine, even if it hasn’t encouraged banks to lend more to small businesses which is its stated aim.
There have been across the board cuts in projected spending increases — which the Labour opposition laments have been “too fast” and “reckless” — but no supply-side economic reforms.
David Cameron last year vowed to fight the “enemies of enterprise” and cut regulations but hasn’t yet. He knows that “the real solution” to Britain’s economic woes “is more enterprise, competition and innovation” but one out of five Britons is still employed by his government which eats up half of the country’s GDP. The top income tax rate was even raised by 1 percentage point in order to reduce the deficit.
This isn’t austerity. It’s a timid approach to fiscal consolidation that lacks the political will or conviction to enact a pro-growth agenda simultaneously.