Cuts will not end the UK crisis
Tumbling stock markets, riots in the streets and rising unemployment are not signs of economic confidence, despite George Osborne's assurances. The British economy remains in a depression, defined by the authoritative National Institute of Social and Economic Research as any period in which output remains below its previous peak. The UK depression has already lasted three years, and NIESR argues that is likely to last five years or more – longer than that of 1930s.
Yet economic debate is dominated by counterproductive attempts to reduce the deficit through cuts in public spending, which are now the single most important cause of the depression. Before the cuts of last October's comprehensive spending review, the economy had grown by 2.5%. Because of the slowdown the government will miss its targets to reduce the deficit by some distance, an entirely self-defeating policy.
The notion that stagnation is the necessary consequence of deficits and debt inherited from a profligate Labour government is nonsense akin to the Tea Party-led hysteria in the US, yet this view dominates the debate in Britain. The budgetary squeeze introduced by the Tory-led coalition has brought about lower aggregate demand, which lowers business confidence in the growth outlook. Critically, private sector investment has almost collapsed, and it is this slump that now accounts for 80% of the total output lost since the recession began. In the first quarter of 2011 GDP was £56.3bn below its peak level in the first quarter of 2008, and the fall in private sector investment (gross fixed capital formation) is £44.9bn.
Most Recommended Comment
Arlington, Virginia, United States