By Stephen Archer, Business Analyst and Director of Spring Partnerships
The loss of the AAA rating from Moody’s would seem to cement the answer as a yes to this question — but it need not be so. Much as George Osborne may bluster the loss of credit rating, it shows that austerity policies alone will not suffice in the current economic malaise that is affecting most mature economies today.
Yes, there are those including Moody’s who are saying that the attack on the deficit is too timid — really? Just how much of a hole do we want below the waterline? The US and France have suffered downgrades and France may yet suffer more economic hardship — but the US is set for a steady recovery.
Why? In reality the US economic policy has differed little from the UK but the economy is structurally more flexible and efficient. Labour laws and other business ‘red tape’ are far less onerous in the US as are wage flexibilities. In the US a lot of manufacturing has been repatriated from China now with 50% of large businesses intending to ‘re-shore’ manufacturing.
The lessons of austerity are all too clear. It reduces wages, real income, spending power and GDP follows. Austerity does not drive growth other than in the very very long term — a time span we do not have the luxury of. This is even true when interest rates are close to zero. People are still de-coupling debt and businesses are sitting on cash because the economy is going backwards. Business confidence is very low. The situation is now also accompanied by an unhelpful inflation rate seemingly stuck at 2% and likely to rise thanks to the falling pound and rising cost of imports.
There is only one way out of this stagnation, a growth strategy. Whether one agrees or not the US is turning a blind eye to its burgeoning debt and inability to cut the deficit in a meaningful way. The debt ceiling will have to be raised again and I would not discount the prospect of a $20 Trillion debt. It’s the same story in the UK — all be it at a tenth of this number — but the UK seems intent on heading for a more universal hair shirt policy (whilst also intending to spend £33 billion on a rail network that no one wants!)
The effects of austerity are clear to see across Europe and much as we want and need in the long run to reduce the structural deficit we cannot hope to do so with a smaller and shrinking economy. The UK (and US) has commendably reduced the state’s share of GDP but now there must be a focus on enabling growth in enterprise which has been fudged around with for the past 3 years to little avail.
We need major tax breaks for start ups, much more easily available investment cash for both new and additional enterprises and local authorities should be offering major local tax breaks. In short the UK needs to be treated as an enterprise zone, even more so in the north. Until we get investment in business and the means for export and commercial growth the rest of the austerity measures are of no value and will further degrade the economy, the skills pool and society as a whole.
We risk years of stagnation unless we put austerity on hold. This will slow the run on the pound and attract inward as well as domestic investment.
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