Published on May 16th, 2013 |
by Jack Cowell
Image © Chatham House
Austerity’s Not Working
Economic figures released a few weeks ago have prompted the Chancellor to suggest that “we are making progress”. The 0.3% GDP growth has seemingly spared the UK a triple-dip recession. This is taken as a key indicator that austerity is working. Slowly but surely we’re getting there. It’s a marathon, not a race. Strong foundations build a brighter future. I could go on guessing what garbage cliches politicians will come out with in their circus of ideological masturbation. The fact of the matter is that the state of the UK economy is dire. Several facts make this the case and these must be at the forefront of discussion, if one genuinely believes that it is the long-haul that matters.
Following an austere fiscal policy in times of normal economic activity is rather prudent, but the game changes when interest rates are near zero, and are guaranteed to remain so by central banks. When this is the case, high government deficits can easily be cancelled out by increased revenue, as several studies have shown. All that needs to be concentrated on, is the effective directing of investment to projects which will produce revenue once interest rates have gone up again and spending from borrowing needs to be cut down. Hoarding money at incredibly low interest rates (which effectively translates into money being cheaper than usual) seems to make little sense.
The employment rate in this country is testament to the fact that, contrary to what many advocates of tight fiscal policy say, increased spending would increase economic output. The desperation of many to work makes minimum wage more attractive; this makes it more likely that you will get a return on your invested pound which in turn can be reinvested. However this is not happening. Although the economy grew by 0.3% (thus canceling out the 0.3% contraction of last quarter, meaning the economy is at standstill) construction declined by 2.5% in terms of output. This is exactly the sort of industry that is easy to invest in, easy to extract profits in the future, and easy to get plenty of people employed in.
Almost all advocates of austerity I have listened to cite reasons which would make it prudent to be austere with capital in times of prosperity. The only logic for following such measures in times of crisis is to appease credit rating agencies and the IMF. Neither of these institutions have looked favorably on the UK recently. Why austerity is still being followed then remains a mystery to me.
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