Austerity has been a disaster for UK

[Póg mo 1,749]

Failed plans fall into three categories. There are good plans that are poorly executed, as in the blueprint drawn up by Count Alfred von Schlieffen for the invasion of France in 1914. There are strategically bad plans that are well executed, as in Napoleon's Russian campaign of 1812. And then there's the coalition government's deficit reduction plan.

Last Friday's monthly update on the public finances was grim reading for George Osborne and his Liberal Democrat sidekick Danny Alexander. Back in the happy days of 2010 the talk was of how an ambitious plan to reduce the red ink splattered all over the Treasury's books could be combined with robust growth and the protection of frontline services. Not one of these objectives has been met.

The quality of public services has been diminished by job cuts, the economy has hit the wall and, perhaps most tellingly of all, the gap between what the government spends and what it receives in taxes is getting bigger, not smaller.

The deficit last month was more than £14bn, slightly up on the previous year and a record for any August. On budget day, the chancellor said he expected the deficit to fall by more than 4% in the current financial year; in the first five months of 2012-13 it is 21% up on 2011-12. It will take a rapid – and wholly unlikely – acceleration in growth over the next few months for Osborne to have the remotest chance of hitting his forecasts.

More probably, he will have to use his autumn statement in early December to admit that he is going to break at least one of the rules he set himself for control of the public finances when he became chancellor. The target of reducing debt as a share of national income by the end of this parliament already looks fanciful given the flatlining of the economy over the past 18 months, leaving Osborne with the choice of setting a new, less onerous challenge or announcing fresh austerity plans.

Humiliating though it will be, the chancellor will almost certainly take the first option. The deficit reduction plan already implies greater austerity in 2013-14 and 2014-15 than in the current financial year, and it would be a brave chancellor who would remove extra demand from an economy already fragile. The idea of expansionary fiscal contraction – getting tough with the budget boosts growth by allowing monetary policy to work its magic – has proved a dud. Why? Because the banking system is broken and the over-indebted are not interested in taking on more debt no matter how far interest rates fall. Osborne and the Office for Budget Responsibility (OBR) have massively overestimated the power of monetary policy, so to further tighten fiscal policy would result in even weaker growth and make the government's fiscal objectives even harder to achieve.

Osborne will fall back on the defence used by every chancellor since time immemorial: blame the foreigner. Had it not been for the sovereign debt crisis in the eurozone, the rise in oil prices, and the sluggishness of the global economy, he will say, everything would be going swimmingly by now. There was nothing wrong with the plan. It was a super plan. It was, indeed, the only plan that could have saved Britain from Greek-style debt dystopia. It was just that other people messed things up.

Sir Mervyn King is providing the chancellor with a certain amount of political cover for his U-turn. The governor of the Bank of England says it will be all right for the government to miss its debt target provided it is the result of external factors and not due to his going soft on deficit reduction itself. Given that King stood four square behind Osborne's austerity from the outset and has used the same defence for the bank's record of consistently over-estimating growth and under-estimating inflation, his support is unsurprising but welcome if it prevents Osborne from compounding his own errors.

For while it is true that Labour's stewardship of the public finances left a lot to be desired in advance of the Great Crash of 2007 and that any government faced with a budget deficit of 11% of national output would be forced to take steps to balance the books, the fact is that Osborne's plan was ill-conceived, hastily drawn up, based on overly optimistic forecasts and executed in such a way as to amplify the pain felt by the public.

The failings of Plan A are explored by Brian Reading in a paper for Lombard Street Research called The Blunt Axe. The title is a reference to the so-called Geddes Axe, the programme of deep spending cuts imposed in the early 1920s following close scrutiny of where savings could be made.

Reading's assessment of Osborne's approach is scathing, arguing that it failed miserably to accomplish the coalition's "urgent priority to secure economic stability at a time of continuing uncertainty in the global economy". In particular, the paper says there was no attempt to assess the impact on growth of spending cuts, the government hid behind "rosy forecasts" provided by the OBR, it "slashed and burned" investment apart from expensive prestige projects, it made no attempt to identify where taxpayers' money was to be saved, failed to measure the real resources provided to departments given the different inflation rates that apply to services such as health, failed to protect frontline workers (or even identify what work they did), and made no plans for the inevitable cuts in public sector employment, which at 372,000 in the first two years are almost six times as high as the 66,000 estimated by the OBR.

Reading concludes that there was no need for Plan A to savage growth. The coalition, he says, could have substantially boosted investment spending without breaking its own fiscal rules. Instead, net investment spending in 2014-15 is forecast to be almost 60% lower than it was five years earlier. This is not a new phenomenon. Governments of all stripes always find it easier to cut capital spending than current spending, despite the long (and often short) term consequences for the economy.

Nor is Reading convinced by the argument that everything can be blamed on events on the other side of the Channel. "The deteriorating global environment and euro-debacle undoubtedly damaged the British economy, but were foreseeable. The OBR was an accomplice, persistently awarding pass marks despite darkening skies." Calling for a new Geddes commission, he concludes: "The axe was blunt, the axeman blind."

In one respect, Osborne is right. The public finances are in a terrible mess and need to be fixed. Ed Balls will have to come up with a credible blueprint if Labour wins the next election. But what the past two and a half years have proved beyond doubt is that a deficit reduction plan without a growth plan is no deficit reduction plan at all.

http://www.guardian.co.uk/business/2012/sep/23/osborne-deficit-plan-rethink

[mawilson 2,133]

Sobriety is usually a "disaster" for alcoholics, but "more alcohol" is not the answer.

Short-term pain for long-term prosperity (emphasis on pain) - a simple concept Americans seem to struggle with, yet the British people understand very well.

[Mr. Big Dog 10,747]

Back in the happy days of 2010 the talk was of how an ambitious plan to reduce the red ink splattered all over the Treasury's books could be combined with robust growth and the protection of frontline services.

I swear someone is making that very same argument to the American people right now.

Not one of these objectives has been met.

And I swear I have yet to hear any convincing explanation how these objectives would magically be met here and now while they have not been met anywhere this plan has been tried. Ever.

Sobriety is usually a "disaster" for alcoholics, but "more alcohol" is not the answer.

Short-term pain for long-term prosperity (emphasis on pain) - a simple concept Americans seem to struggle with, yet the British people understand very well.

Do they now? Does what they're getting match what they've been promised two years ago?

Edited September 24, 2012 by Mr. Big Dog

[mawilson 2,133]

Do they now? Does what they're getting match what they've been promised two years ago?

Two years? Two years is a mere blip in terms of the time required to undo the mess than has been created over decades.

The simplistic "are you better off" is a silly soundbite. The much more important question is how to keep future generations better off.

[Mr. Big Dog 10,747]

Two years? Two years is a mere blip in terms of the time required to undo the mess than has been created over decades.

The simplistic "are you better off" is a silly soundbite. The much more important question is how to keep future generations better off.

I don't disagree that two years is a short time considering the damage that's been done over decades. That doesn't change the fact, however, that the politicians that proposed the austerity measures in the UK and elsewhere then - as well as those that propose them on these shores now - do not talk about the extended pain that such measures necessarily bring about. They would have you believe that austerity produces immediate prosperity. It doesn't. Never has, never will. So Romney and Ryan should be going around the country telling people to look at Ireland, the UK, Spain, Portugal and Greece to get an idea what austerity does in terms of economic growth (it makes it disappear in the short and mid term) and unemployment (it boosts unemployment for years to come). They should be honest about it. They're not.

[mawilson 2,133]

I don't disagree that two years is a short time considering the damage that's been done over decades. That doesn't change the fact, however, that the politicians that proposed the austerity measures in the UK and elsewhere then - as well as those that propose them on these shores now - do not talk about the extended pain that such measures necessarily bring about. They would have you believe that austerity produces immediate prosperity. It doesn't. Never has, never will. So Romney and Ryan should be going around the country telling people to look at Ireland, the UK, Spain, Portugal and Greece to get an idea what austerity does in terms of economic growth (it makes it disappear in the short and mid term) and unemployment (it boosts unemployment for years to come). They should be honest about it. They're not.

Most people understand that recovery from drug addiction is a long and painful process.

[Mr. Big Dog 10,747]

Most people understand that recovery from drug addiction is a long and painful process.

Why are RR running around the country then telling people the exact opposite?

[mawilson 2,133]

Why are RR running around the country then telling people the exact opposite?

Same reason Democrats are running around the country telling people that teachers pay a higher tax rate than millionaires.

They are liars.

[Mr. Big Dog 10,747]

Same reason Democrats are running around the country telling people that teachers pay a higher tax rate than millionaires.

They are liars.

Good, so we agree that the Romney / Ryan proposals will not grow the economy as they claim it will, will not produce job or income growth as they claim it will and will not reduce the deficit or debt as they claim it will. They're entire economic and fiscal plan is a lie.

[Usui Takumi 1,562]

Sobriety is usually a "disaster" for alcoholics, but "more alcohol" is not the answer.

Short-term pain for long-term prosperity (emphasis on pain) - a simple concept Americans seem to struggle with, yet the British people understand very well.

Look at it like this. You have a patient with a serious addiction...you don't cut him off cold, you give him methadone for awhile.

In the US I don't understand why anyone hasn't considered a stepped approach to taxes and spending cuts. IE ratchet up taxes maybe 0.5-1% year instead of letting sections of the code expire all at once. Same with spending. In all honesty, starting in 2014 the pentagon's budget should be able to be cut by 1/3 easy along with shutting down European bases.

[one...two...tree 2,762]

Look at it like this. You have a patient with a serious addiction...you don't cut him off cold, you give him methadone for awhile.

In the US I don't understand why anyone hasn't considered a stepped approach to taxes and spending cuts. IE ratchet up taxes maybe 0.5-1% year instead of letting sections of the code expire all at once. Same with spending. In all honesty, starting in 2014 the pentagon's budget should be able to be cut by 1/3 easy along with shutting down European bases.

Excellent idea. It would be a good way to demonstrate a cause and effect between tax rates and job growth.

[Póg mo 1,749]

Sobriety is usually a "disaster" for alcoholics, but "more alcohol" is not the answer.

Short-term pain for long-term prosperity (emphasis on pain) - a simple concept Americans seem to struggle with, yet the British people understand very well.

Excuse me, but isn't the point of austerity, supposedly to cut the deficit? Ireland has been in recession since 2008 and is borrowing as much today as it was then, and this despite huge cuts to government expenditure. Ditto for Greece, Spain, Portugal, etc.

None of these countries will improve until the underlying cause has been dealt with i.e. excessive debt overhang on the economy. Cutting salaries etc, without doing something to deal with high levels of personal debt only exacerbates the problem.

[Póg mo 1,749]

This is what the poor and middle income people in the UK have to look forward to, even if and when growth returns:

Living standards for low and middle income households will be poorer in 2020 than they were in 2008, according to a “sobering” report.

Even if growth returns to the UK economy in the coming years, incomes for the lowest groups are set to fall by up to 15% by the end of the decade.

The study, for the Resolution Foundation think-tank, by the Institute for Employment Research (IER) and Institute for Fiscal Studies (IFS) looked at the changing structure of the jobs market together with the effects of the tax and benefits system.

Their report, Who Gains From Growth?, found a low income household, which had a net income of £10,600 a year in 2008, would earn the equivalent of just £9,000 a year by 2020 - a decline of 15% in real terms.

A middle income household, which had a net income of £23,000 in 2008, would bring in £22,200 by 2020 - a real-terms decline of 3%.

The calculations assumed that GDP (gross domestic product) will recover steadily and then grow at 2.5% from 2015.

Authors of the report said traditionally middle-ranking jobs, such as administrative work and skilled manufacturing are drying up, while two million top jobs - such as managerial roles - would be created by the end of the decade, as well as 700,000 low-skilled jobs in retail, caring and leisure.

The report also said changes in the way work is spread out between households, and plans to the tax-benefit system, will contribute to the decline in living standards.

Working hours are likely to grow in higher income households faster than in households with lower incomes, while households that receive government support - particularly those with children - would fall steadily further behind.

Gavin Kelly, chief executive of the Resolution Foundation, said: "This is a powerful wake-up call - it gives us the most detailed account to date of the bleak outlook for living standards over the next decade if we fail to tackle some of the underlying weaknesses in our economy.

"It suggests that millions of families will struggle, to an extent we have not seen in other periods of growth, to progress and raise their incomes.

"It's particularly sobering that this outlook is based on optimistic assumptions about growth in the economy with a steadily rising number of people in employment."

Professor Mike Brewer, research fellow at the IFS, said: "This analysis confirms the strong currents that will be pushing against income growth in the next ten years, even once a recovery in GDP takes hold.

"Britain looks likely to see continuing polarisation in our labour market as more high - and low - paid jobs are created, skewing the distribution of income growth towards higher income households.

"Meanwhile, support through the tax and benefit system is set to fall over the long-term, particularly because of the decision to link tax credits and benefits to the lower Consumer Prices Index measure of inflation, meaning that lower income households will tend to fall behind."

PA

http://www.independent.co.uk/news/uk/home-news/report-predicts-15-drop-in-income-8166303.html