It’s The Real Economy Stupid!

Today in the Western Mail I have an article attacking the irresponsibility of the new UK Government’s decision to introduce an EXTRA £6bn of cuts for this financial year. It was symbolic for two reasons. Firstly, as the new Administrations first major announcement it clearly was aimed at the Markets and appeasing City creditors. This despite knowing that the next day’s labour market statistics were going to indicate a worsening situation – with unemployment rising and the employment rate at its lowest rate since 1996 of just 72% (of working age people). It also clearly indicated where the balance of power lies in the new Administration. One of the major dividing line between the Tories and Lib Dems during the election was that the Tories £6bn of extra cuts would drive the economy into a doubles dip recession. Yet a few hours after assuming power the Lib Dems caved in despite the labour market data I refer to above.

The reality is that we now have a UK Government even more committed to free market fundamentalism and unbridled capitalism than New Labour. Basing economic policy on pleasing markets is deeply irresponsible when one of the major real economy indicators in labour statistics indicate a fragile position. John Maynard Keynes observed ‘look after unemployment and the budget will look after itself’. The rationale of the argument is that as long as people are in work, Treasury tax receipts are maintained and cash circulates in the economy and state liabilities in terms of out of work benefit payments are kept lower. The danger of rising unemployment is that tax receipts dry up, cash circulation in the economy stalls, welfare liabilities increase as well as associated debt and health problems. As always the key element to any deficit reduction plan has to be sustained economic growth. Even Thatcher’s former economic adviser Professor Patrick Minford agrees with this if I interpret his comments correctly. There will be no economic recovery if unemployment rockets. The deficit will actually get worse as will more worryingly the long term public debt balance sheet.

The unemployment rate in Wales is higher than the UK average at around 9% (UK 8%). The Republic of Ireland has followed an austerity path as now advocated by the UK Government and unemployment has rocketed to 14% with no of the peak. This is double dip if not depression territory.

Of course economies such as ours in Wales are far more exposed to overt fiscal strengthening proposals based on swinging public investment cuts due to the make up of our economy. Wales already faced £400m of cuts based on Labour’s plans this year and now we face an extra £300m with the prospect of protracted cuts during the duration of the whole Westminster cycle. No wonder the Tories and Lib Dems want a 5 year fixed Parliament!

The economic super brain Joseph Stiglitz writing for the Guardian yesterday warned of the dangers of deficit-cut fetishism. For Stiglitz basing economic policies on appeasing markets is like negotiating with a crazy man. You can give him what he wants and he will probably still shoot you. Instead Governments have to react to the raw data available to them. Based on the labour stats it is very worrying that the UK Government now wants to impose more cuts.

In light of what’s in front of us I’m even more disappointed that Labour MPs went native. There was a genuine opportunity to realign politics at UK level on a progressive platform based on political, economic and social reform. But despite the efforts of politicians like Peter Hain, most of the Parliamentary Labour Party followed the path of self interest and wallowed in tribalism and sectarianism. The consequence will be that the coping classes will bear the brunt as the economic elite continue to be recession proofed. Fasten your belts – were on an economic rollercoaster.

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