Think Tank claims UK austerity measures shrinking output

According to the National Institute of Economic and Social Research the UK economy may actually shrink by half a percentage point in 2012 compared to an earlier estimate of zero growth. The think tank blames austerity measures for the decline.

The NIESR(National Institute for Economic and Social Research) predicts that no recovery of any significance will take place until 2014. Both cuts to government spending and economic prospects for Europe given the debt crisis will contribute to this very slow recovery. The think tank claims that output in the UK would have been considerably higher had deficit reduction been postponed for three years. The NIESR predicted only 1.3% growth in 2013.
The NIESR claims that output this year would have grown 1.2% if the measures had been postponed. Over a decade the austerity measures may have lowered UK growth by 16.5%
Output in the UK dropped by 7 tenths of a percent in the second quarter of this year. Some analysts are calling for an easing of spending cuts as well as tax hikes but so far the coalition government of Conservatives and Liberal Democrats has held firm to its deficit reduction plans.
The NIESR claims that unemployment in the UK will peak at 8.6% next year somewhat below their earlier forecast of almost 9%. This is still much better than many European countries. The government could also still erase the structural budget deficit by 2017 as it plans.
Nevertheless economists at the NIESR recommended spending and easing of austerity measures.
"It remains the case that there is scope for a less aggressive path of fiscal tightening..The government should consider on-balance sheet funding of key projects, concurrent with a comprehensive restructuring of banks and key funding markets."
While the Labour opposition party has criticized the government austerity programs the government has the support of the OECD and the IMF. The IMF did caution however that if the economy continued to shrink that there should be some fiscal "loosening".
The Bank of England has engaged in some quantitative easing and plans to buy 50 billion pounds more in UK government bonds. The NIESR argues that this policy is now providing diminishing returns.
While many liberal economists such as Paul Krugman criticize austerity measures for lowering growth rates or even causing GDP to decline this ignores positive features of the policy from a capitalist perspective. Austerity measures lead to reduced expectations, and slash entitlement spending. They also weaken the power of labor. Increased unemployment reduces wage demands. All of these features in the longer term will improve profitability. As the positive spinners put it competitiveness is improved. The issue is also covered here.

N.Y. Times editorial: Britain continues with failed economic policies

An editorial in the recent Sunday Review of the New York Times criticizes the UK Cameron government's plans to slash deficits and promote economic growth. The editorial claims that Cameron's policies failed when he began them a year and a half ago. Now he is continuing on with the same failed policies.

Cameron attempted to stimulate growth through radical austerity programs. Recent figures show that British growth is flat while unemployment is still going up and not down. The ratio of debt to GDP is climbing faster than the government had predicted. The governing Liberal-Conservative coalition solution to the problem is more of the same.

The austerity policies have reduced consumer demand slowing growth. Since the economy is not growing revenues to pay off the deficit have fallen so that the government has now been forced to change it deficit targets into the future.

The government now plans on further cuts to spending and will extend the austerity measures until 2017. This will mean more years of underfunded public services and lagging growth.

Projections are for output to actually shrink slightly by 0.1 per cent this quarter and grow only by the same amount in the first quarter next year.

The UK has 2.6 million unemployed the highest in 17 years. Unemployment is particularly severe among the young.

The editorial recommends the same type of strategy as economists such as Paul Krugman. In the short-term more money should be spent and not less to increase production. This should be combined with long-term debt reduction policies.

In my opinion the editorial misses the point of the austerity exercises. These policies are not just meant to be debt reduction policies, they are meant to force cuts to the social safety net and public services. More money will be available for profit. The working class is being put in its place and told that decent pensions and other benefits that have helped wed workers to the system are no longer sustainable. The policies the editorial discusses are not just British policies they can be found in Greece formerly under a Socialist government and in many countries regardless of whether governments are nominally left or right. For more see this article.

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Broke Britain

This is from the Indpendent. Not only many in the US are having trouble but elsewhere the same problems are created for working people from not being able to make ends meet. Easy credit terms and advertising that creates a mass of consumer oriented people certainly helps create this situation. For capitalism to keep increasing production such consumers are necessary. Eons ago Herbert Marcuse wrote about this in books such as One Dimensional Man.


Broke Britain: millions face struggle to stay afloat as financial crisis hits home
By Martin Hickman, Consumer Affairs Correspondent
Published: 02 January 2008
Debt experts are predicting a record number of personal insolvencies this year as excessive Christmas shopping, rising mortgage payments and soaring food and fuel costs force thousands of people over the financial edge and into bankruptcy.

More than nine million individuals in Britain are now believed to be struggling to pay credit card bills and mortgages, with the average owed by problem debtors hitting £30,000.

In alarming figures to be released tomorrow, the accountancy firm Grant Thornton predicts the total number of personal insolvencies will jump to at least 120,000 this year, almost triple the equivalent figure in 2004, when just under 47,000 people went bankrupt.

Insolvency experts say people have been readily loading large amounts of debt on to credit cards and personal loans, despite the economic slowdown.

High-street shops and online retailers reported higher-than-forecast takings in December, while the new year sales have also been busier than expected. One commentator described the Christmas shopping spree as one last hurrah before a tougher 12 months ahead.

Although the economy is still vibrant and employment plentiful, the supply of cheap and easy credit that has revved the economy for years is being turned off as a result of the sub-prime lending crisis in the United States. Fewer mortgages are being granted to people in Britain with poor credit records. Credit card limits are being lowered and personal loans are becoming harder to obtain.

According to a poll conducted by Uswitch.com in November, 38 per cent of new applicants for credit cards and 19 per cent of applicants for new personal loans were rejected, while 6 per cent have had their credit card limit cut. With food and fuel prices also set to rise in the new year, levels of disposable income are likely to drop, deepening the difficulties of those attempting to repay debts.

Those already in debt will find themselves at the mercy of collection agencies more determined than ever to recoup money for clients. According to one industry journal, the coming crisis means that "debt collection agencies will need to adopt more sophisticated methods in order to deliver value back to their clients".

The latest figures indicate that 23 per cent of people – 9.5 million adults – were finding their current level of debt "unmanageable". Although the Bank of England cut the base rate of interest last month, an estimated 1.4 million people will still have to pay more for their home loans when their fixed-rate deals come to an end this year, costing an extra £150 to £250 a month.