A Plague on all their Houses

As the dust settles following the Comprehensive Spending Review there appears to be a collective understanding that our worst fears have been realised. Despite all the rhetoric of the Westminster Election campaign, the Emergency Budget and the lead up to the Spending Review itself, there was always the hope that the Conservatives – and the Lib Dems would acknowledge the weight of economic evidence available and embark on a more sensible course.

Nobody is arguing that the annual deficit is not serious. A shortfall of 11.4% (2009-10 financial year, ONS) or so is unsustainable. The debate is whether the Conservatives and Lib Dems in aiming to slash the deficit to 2% by 2015 are moving too fast and too deeply.

There is no economic rationale behind the level of consolidation pursued by the UK Government. Total debt as a percentage of GDP is 71.3% (end of March 2010, ONS), only 11% above the fiscally conservative European Commission debt reference level under the terms of the Maastricht Treaty. Considering the scale of the economic downturn we have just witnessed, there is no reason whatsoever to push the panic button.

The Governments priority has to be steering the economy through its current fragility as well as addressing the structural faults of the economic model built up over the last thirsty years by successive Tory and Labour Administrations – primarily in terms of its sectoral and geographical imbalances.

The argument of the Conservatives and the Lib Dems seems to be that unless the deficit is tackled within the lifetime of the current Westminster Parliament, the money markets will lose all confidence and interest payments on Government debt will increase further stifling economic progress. This is the argument used by the Government of the Republic of Ireland to drive through their own austerity programme. The result – unemployment at over 14% with no sign of the peak, a collapse in the real economy, and the very people who demanded excessive cuts, increasing interest charges on the Government’s debt.

The reality is that if things don’t go to plan the very people who were pushing for excessive cuts will be the first to pull the trigger. As Nobel economic laureate Joseph Stiglitz has observed, basing economic policy on the whims of the markets is like negotiating with a crazy man. You may give him exactly what he wants, but he may still shoot you! The key to preserving market confidence in the economy is a credible deficit reduction plan which doesn’t endanger economic growth. Considering it takes over 13 years for UK Government debt to mature, a more cautious course of action is in order.

The reality of the situation is that the UK Government have embarked on a major gamble not only with the state of the economy but also the lives of every single person. The UK Government admit that their plans will lead to the loss of half a million public sector job, which could well be doubled when considering the impact on the private sector. There is little evidence to suggest that the private sector will be able to fill the vacuum left by the reduction of 20% of public spending over the next four years. Indeed the Chartered Institute of Personnel and Development estimate that the scale of the austerity measures will lead to 1.6 million job losses. 700,000 in the public sector and 900,000 in the private sector. THey estimate that the economy will have to grow at over 2.5% per annum to create 300,000 new net jobs in the private sector. As keynes observed in the 1930s ‘look after unemployment and the budget will look after itself’. Thats is why the real test for the UK Government will be unemployment levels, especially in those areas of the state that continue to suffer from the legacy of the 1980s and 1990s.

There clearly isn’t a plan B, apart from the musings of slacking monetary policy. With Bank of England interest rates are at an all time low of only 0.5% then this can only mean further quantitative easing (QE) – stocking up inflationary pressures for the future. Considering that the £200bn of QE we have already witnessed seems to have by-passed the real economy on its way to the depositories of the big banks, it’s difficult to have any confidence in the claims of the UK Government that monetary policy will be able to counteract the consequences of its fiscal policy.

Labour’s mismanagement of the economy created this mess. Growth under Labour was based on bubbles in house prices and personal debt. The economy became ever more reliant upon the financial sector concentrated in the city of London whilst traditional manufacturing economies such as ours were neglected.

The inevitable consequence of this CSR will be increasing individual poverty levels and accelerated national/regional wealth polarisation at even a faster rate that the Labour years. This is especially worrying news for Wales and our communities. It is telling that of the few investments projects announced during the CSR there was nothing for Wales. Together with the damaging 11.9% cut to the Welsh Government’s budget and the savage cut to welfare spending – no aspect of our lives will go untouched. The pain of not only the economic downturn, but now the chosen remedy will be felt acutely in our communities here in Carmarthenshire.

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