In February 2010, just before the general election, chancellor George Osborne set out his economic objectives "against which I expect to be judged". High among them was retaining Britain's AAA credit rating. Now the credit rating agency Moody's has stripped Britain of its AAA rating. So judging Osborne by his own criterion, he has failed. Moody's explained their decision as due to "continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which it now expects will extend into the second half of the decade". Put simply, the economy isn't growing, and isn't expected to grow, and the implication of that for our debt to GDP ratio is dire. In the short term, Moody's decision is unlikely in itself to change anything, since the markets were expecting it and have factored it into their decisions. But it does signal that the government has failed. In three years we've gone from a triple A credit rating to a triple dip recession.
Why has Osborne failed?The government's austerity program cut public spending. The intention was for the government to spend less but get the same amount coming in through taxes, therefore reducing the difference between these figures, the deficit. Unfortunately, cutting public spending also cut the amount of money circulating in the economy, meaning that people couldn't afford to buy things, so economic activity went down. This means tax receipts went down, so the the deficit didn't fall much at all, it's currently at £120bn/year compared to its peak in 2009/2010 of £150bn/yr. The reduction in economic activity also reduced the country's GDP, causing an increase in the ratio of national debt to GDP. By the end of 2012, national debt (excluding commitments to banks) had risen to 70.7% of GDP, higher than it ever was under the last Labour government, and it is expected to continue rising, hence the downgrade. The Conservative manifesto said "Our belief in responsibility with public finances is the starting point of our plan for economic recovery and growth" and "We will deal with Labour’s debt crisis and stop the Labour jobs tax that would kill our economic recovery". They were right about Labour leaving a debt crisis, but today we have a Conservative/Liberal Democrat debt crisis that is much worse. And with Britain on the edge of a triple dip recession, they themselves have killed our economic recovery.
So if austerity doesn't work, what does?The government needs to embark on a program of infrastructure spending, on things such as housing, roads, and fibre-optic networks. This program would be paid for by quantitative easing (QE). If the economy was running at full capacity, QE would be pointless, since all it would do is cause inflation. But the economy isn't running at full capacity, and we've had £375 billion of QE without causing inflation; so further QE is unlikely to cause inflation. The infrastructure spending would have the immediate benefit of making things people want, which is after all the whole purpose of the economy. The secondary benefit is it would put money in the hands of working people, who would spend it, giving that money to other people, who would themselves spend it, etc., so each £1 of stimulus would result in several pounds of extra economic activity. ~ Phil Hunt is a member of the Pirate Party based in Edinburgh, where he has stood as a council candidate and organises local party events, he can be contacted at [email protected] Osborne image courtesy M. Holland