Too scared to cut, too dumb to grow

In: Uncategorized

21 Jun 2010

This is my comment from the latest Fund Strategy.

Despite all the talk of austerity in this week’s budget the scale of cuts made this year is likely to be small. This is in line with the trend in much of Europe to exaggerate the immediate scale of austerity.

At the time of writing the coalition government had announced £6.2 billion of cuts this financial year plus another £2 billion of more general cuts. It had also put £8.5 billion of spending under review.

Although these figures might sound substantial they should be set against a deficit of about £156 billion and GDP of about £1.5 trillion. If the only cuts made this financial year are £6.2 billion that is equivalent to about 0.4% of GDP.

A similar trend is apparent across Europe. For example, Germany’s €80 billion (£67 billion) cuts programme has been branded the largest cuts package since the second world war. Yet it is estimated by Barclays Capital that spending will increase by 1.5% in 2010. Even 2011 will only see cuts of 0.4%.

The big exception to this trend is Greece with 7% budget cuts forecast for this year and 4% for next year. Ireland, Spain and Portugal will also suffer larger cuts than the bigger European economies.

This suggests a reluctance to impose austerity unless it is imposed by external pressure. This could be the markets, other states or a combination of the two.

In Britain both parties of the ruling coalition have talked intermittently about austerity for the past 18 months or so. But they seem intent on delaying its imposition for as long as possible. They are also anxious to outsource as much responsibility for the cuts as they can to bodies such as the Office for Budget Responsibility. The “engagement exercise” set up by the government is designed to play a similar role.

The ruling coalition is far away from the old-style free marketeers that the Labour opposition likes to portray. It is a technocratic government which is breathtakingly indecisive.

It could well take a Greek-style crisis for it to be forced to make severe cuts. Then responsibility could be pinned on the financial markets, European Union or the International Monetary Fund.

Of course the alternative would be to have a political discussion about how best to promote growth. That would necessarily involve a broad debate within society rather than remaining confined to Britain’s blinkered elite. But such an outcome seems beyond the limited imagination of our present rulers.