THe Markets Are Loading their Guns

No sooner has the Irish Government been forced into accepting a reported 90bn euro bailout in an effort to restore market confidence, the guns have been turned on Portugal with its cost of insuring against default increasing. ‘Market’ confidence in the Irish economy remains at crisis point with the possibility of the Government falling and its inability to push through yet more austerity measures in an emergency budget.

Despite the cowing of the political right and Eurosceptics – they should be very worried that Ireland could provide a taste of what is about to come.

The Nobel prize economist Joseph Stiglitz warned in response to the deficit fetishism we have witnessed around the world in response to the banking crisis that basing economic policy in order to appease markets was like negotiating with a crazy man – you may give him exactly what he wants but he could still shoot you. I’ve used those wise words in debate in order to highlight my concerns in relation to the trajectory of UK Government fiscal policy.

This has certainly proven to be the case in Ireland, where the markets have pulled the trigger despite it pursuing a severe austerity programme. Remember unemployment in Ireland was already at 14% with no sign of the peak. As a result of the Budget measures the Taoiseach is currently desperately trying to push through, unemployment levels will certainly increase even further and faster.

Indeed, The Business Secretary Vince Cable once championed such an argument, before a Damascus like conversion on becoming Business Secretary. Within days he was advocating an Irish type austerity programme in order to maintain market confidence.

The Irish Government made a catastrophic decision in 2008 when in providing a 100% guarantee on the debts of its bank, turned a financial crisis into a sovereign debt crisis. The Irish Government ran large budget surpluses in the five years leading to the crisis. Its current difficulties are almost all the fault of the irresponsible actions of its banking sector. Thankfully, the UK Government didn’t make such a catastrophic mistake. However, that doesn’t mean we are out of the woods – far from it. If the austerity programme leads to weaker growth as is more than conceivable, market confidence could equally falter here leading to the exact opposite of the intended objective of the current Government. Similarly the UK shares the same structural deficiencies in its economic model. Irish economic growth and UK economic growth under the Labour Government here was driven largely by the banking and housing sector. Over reliance on the financial sector means that the Irish and UK economy are more exposed to the crisis in the financial sector than those nation states that had a more balanced economy. The unsustainable property boom and associated consumer debt bubble is as much of a problem here as it is in Ireland.

Public debt in the UK as a percentage of GDP is not that high compared to the current European norm at around 71%. Only 11% above the fiscally conservative European Commissions debt reference level under the terms of the Maastricht Treaty. (The annual deficit is clearly unsustainable and needs to be reduced). The Aggregate debt which includes consumer (or personal debt) and commercial borrowing is extremely high. In much of the debate surrounding the economy, the incredibly high levels of consumer debt has barely been mentioned yet is a major barrier for the future.

There are four main components that drive economic growth. Exports, investment, household spending, government spending. Considering that government spending is to be cut by 19% in real terms during the Comprehensive Spending Review period; that consumer debt in the UK is the equivalent of 100% of GDP at around £1.4 trillion with the VAT increase likely to dampen consumer demand; and that exports are likely to struggle due to the difficulties of the UKs main trading partners, exacerbated if there is contagion to the rest of the Eurozone – it’s difficult to see where growth exactly will come from. Economic stagnation or a double dip recession could well lead to the market vultures turning their attentions to the UK. In light of the economic climate it’s perhaps hardly surprising that this week the Treasury announced that it will not be publishing its promised White Paper on economic growth. This seems to indicate that the new Treasury team have been concentrating far too much on their cuts agenda and have neglected the importance of getting the economy going again in order to increase revenues. Remember that the deficit reduction targets of the UK Government are equally based on Office for Budget Responsibility projections of economic growth of 2.3% in 2011, and continued growth for following years. The OECD only this month reduced its growth projections by 0.8% for next year.

In another major U Turn this week, the Chancellor announced that the aim of increasing transparency in the financial industry by forcing banks to reveal how many of its employees receive bonuses above a £1m threshold are set to be watered down. Without transparency on something as small as this, it’s difficult to see why we as taxpayers should feel any confidence that the banks will behave more responsible in future on pay and bonuses. Once again, it seems all square mile lobbyists needed to twist the arm of the UK Government was the disapora of executive banking jobs to countries with more lax regimes on bonuses.

What is clear is that Government’s across the world have decided that the pain for the irresponsible behaviour of the banking sector will be felt by ordinary working people. Unemployment levels will rise; vital public services will be lost and inflation will be allowed to increase in order to effectively reduce liabilities. With bank bonuses expected to be around £7bn this year, and the pathetic government levy of only £2.5bn it’s clear that those who have got us into this mess have escaped relatively unscathed.

‘We are all in this together’ is the rallying cry of the political right as this crisis takes its course. This clearly isn’t the case. The political leadership of the day have decided that preserving the economic status quo and the wealth and prestige of the super rich is its primary priority. The lessons of the past clearly haven’t been headed. The sectoral and geographical imbalances of the UK economy look like they will worsen rather than improve in the medium term with a devastating effect on the communities such as ours in Wales.

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