With weary familiarity, Britain’s government deficit — the gap between what it spends, and what it receives from taxes — has been revealed as far worse than anticipated.
Last month, the government borrowed £557 million ($846 million). In July last year, it saved £2.5 billion — spending less than it received in taxes.
For the financial year since April, its total deficit has risen to £44 bllion, £11.6 billion higher than the same period last year.
British Chancellor George Osborne entered Number 11 in May 2010 with a single aim in mind: to reduce Britain’s government deficit, and pay back its national debt, by imposing the harshest cuts in public spending since World War II.
This was perhaps the single most foolish economic policy decision ever taken by a British government. It was never going to work, it has not worked, and it is not going to work.
The reason is simple, and sufficiently well-known that neither Osborne, nor his advisers, nor the Treasury have any real excuses for failing to take heed of it.
Government spending cuts reduce demand in the economy. As it reduces its spending, businesses sell less. As businesses sell less they, too, make cuts in spending to reduce costs. They cut wages and make redundancies.
Those on reduced incomes or pushed into unemployment also spend less. A vicious circle is set in train. Any economic textbook will tell you this, and call it the multiplier effect.
When an economy is growing, this effect does not matter so much. Rising spending in the private sector compensates for falling spending in the public. But if an economy is in a recession, or just recovering from a recession — as Britain was, in early 2010 — the single worst policy for a government to follow is precisely the course this one took.
No large economy has ever grown out of a recession by imposing austerity.
There are some specific reasons why the figures for this month are so much worse than expected. The Conservative-Liberal Democrat coalition — which, if nothing else, has become very adept at these sort of excuses — has blamed the temporary closure of a North Sea gasfield for reduced corporation tax receipts, with reduced North Sea revenues accounting for about £1bn of the shortfall.
But this doesn’t account for the £700 million fall in corporation tax receipts from the rest of the economy.
The reason the deficit is growing is because the economy is not. Total tax revenues are down £800 million compared with last year. But the biggest push in the rising deficit is from increased spending, up £2.4 billion on this time last year. That’s an increase in total spending of 5.1%, despite the cuts to public services.
Expenditure has risen overall because the government has had to spend more on unemployment benefits. And it has to spend more on unemployment benefits because there are more unemployed. It is the — entirely predictable — failure of its own economic policy that has led us to this.
There is a clear solution. Instead of imposing cuts, government should spend.
And it should spend wisely, creating sustainable employment by investing in green infrastructure: offshore wind, public transport improvements and loft insulation.
Its own borrowing rates are at a record low, so financing investment is cheap.
Osborne will not do this. The Treasury, using an interesting new definition of the word, is claiming that it will stick to its “credible” deficit reduction plans.
There will be some further efforts to round up additional capital spending, but on nothing like the scale required. The politics of the situation are currently dead against a U-turn.
Simply put, without the monomaniacal commitment to austerity, the coalition has no other economic policy. Take that away, and there is nothing to hold the coalition together.
[Reprinted from Counter Fire.]