Why is the British Government pursuing a policy of austerity while the economy is not growing - Essay Example

? of Learning: The current economic situation being witnessed in the Britain has led to the Government admitting that it is its past strategies and approaches towards dealing with the economic crisis that faced Europe in 2008 that have led to the economic failures being witnessed in the country. The failure strategies and policies include the government opting to greatly cut down on the budgets of some of its departments to as low as thirty percent (Barrell and Liadze, 2009, p. 208). The Government had employed the austerity policies and hoped that it will greatly check on the budget deficit to minimum level of zero percent by the end of that financial year. This was also considered as a move by the government to boost its economic status and assist in paying off its public debt. Despite the above measures, the budget deficit of Britain has remained at an alarming rate and with the impact being felt most by the citizens following the increased recessions (Barrell and Liadze, 2009, p. 207) Pressure in now mounting on the government to come up with working solutions as well as cut down on the credit ratings. The austerity approach failed to meet its intended role of certifying things beyond reasonable doubt thus resulting to a huge setback in the economic development of Britain. The Government of Britain is being accused of simply trying to experiment how efficient the austerity approach can be to its economy (Barrell, Holland, and Hurst, 2012, p. 933).This experiment has led the Britain citizens to live in depression for a long period of time.. From the look of things with regards to Britain economy, it is most likely that the austerity policies will not be easily implemented. Economists have come out strongly explaining that measures like cutting down on government expenditure may in the long run reduce the economic output largely, tax revenues to decrease, and spending on benefits to increase (Barrell and Liadze, 2009, p. 207). This however takes time and may end up resulting in an increase in the budget deficit. The government had intended to win back the favor of investors and businessmen by employing the austerity strategy. The effort to try and salvage the economic situation following the implementation of austerity policies has resulted to a big battle by the Bank of England to try slash investment spending (Delong and Summers, 2012, p. 78). This measure has however remained decimal and depressed. The government has also blamed the Eurozone for being its biggest business partners yet in has don e nothing to help it with the issue of recession. The government of Britain may try resolving this recession issue by loosening its fiscal policy (Delong and Summers, 2012, p. 78). Despite such positive advice, the government has remained adamant and has continued to propagate the pre-Keynesian economics. This approach has resulted in some positive changes in the country’s fiscal policy but most people have not yet felt the fruits of his efforts and opt for better contribution. Back in 2009, the government had forecasted that come 2013, the deficit would have gone down by 3.5 per cent of G.D.P. With time, the forecast has proven to have been too optimistic (Delong and Summers, 2012, p. 78). Despite the government coming up with measures to reduce economic budget deficit as well as government spending, it has not yet fully implemented these measures as it keeps on postponing them with the latest future date being put at them forward until 2016 to 2017 (Fatas, 2012, p. 78). The debt-to-G.D.P. ratio, which the government opted to go up by about seventy per cent, has surprisingly hit seventy-five per cent, and chances are that it will continue to increase up to eighty per cent in 2016. (Fatas, 2012, p. 78). The British government also blames the Eurozone crisis for the immense reduction of the amount of Britain exports goods. If the government realized that the external environment was unreliable it could have adapted to boosting the domestic market and solve this issue (Fatas, 2012, p. 78). The latest data indicate that private domestic spending is still very weak as a result of the increasing fiscal austerity. Private domestic spending has been witnessed to project for some time now. This follows a reduction in employment opportunities a result of massive private sector indebts left overs (Fatas, 2012, p. 78). Such an environment discourages the investors now that they are pushed away by the fear of meeting all existing demand with the capacity already in place. It is rather impossible for an economy to grow when private spending so minimal, the external sector is in decline, and the government is pursuing a deliberate policy of fiscal austerity (Giles, 2012, p. 82).This may be true because the UK economy is greatly exposed to the Eurozone crisis as compared to the US economy. This provides a clue about the difference in fiscal position currently being adopted by the respective national governments in each country. The difference between the governments economy can be viewed as to be caused by the way each respective nation handles their economic cases. The UK government has been announcing its will to put up harsh fiscal austerity on the national economy from the time it assumed office. The government wished to reduce its spending but the Olympics games in 2012 made this rather hard (Giles, 2012, p. 82). However the public announcement to harshly cut down the spending was met with mild reaction from the households and business firms many viewing this efforts as to have diverse effects in future like causing a huge cut of employment opportunities. In contrast to the increased austerity witnessed in the US which has been greatly curtailed by the expansion of the private sector, the budget cut is mostly contributed by the many unsolved political matters in the country (Giles, 2012, p. 83). It is strange that the US government is still handling the issues of job creation and economy growth which are not a topic in the British government. This can be viewed in comparison of the two governments suggesting that that the US government is demonstrating sound macroeconomic policy management because it does not undermine the impact of the private sector and promotes economic growth (Holland and Portes, 2012, p. 123) The US regime can adapt back towards recession just like other Eurozone nations and Britain if the political environment changes in future. Copying ideal from the current neo-liberal mantra that governments can successfully engage in a “fiscal contraction expansion” remains in an ideological assertion without empirical foundation (Holland and Portes, 2012, p. 123). Countries can only grow from economic recession if the private sector is inactive and the government fiscal state is low when the external conditions are suitable and the country's export rate and it compensates the lower domestic demand due to the government deficit budget (Holland and Portes, 2012, p. 123). Small capitalist economies that basically depend on minimal labor costs and exports such as Ireland and larger capitalists economies like UK .US and JAPAN where profits still depend mostly on domestic markets and the unemployed labor force cannot be transported to the rest of the world to relieve the burden on the state both find it hard to solve this problem (Lein, N., 2007, p. 78). The UK as well as other governments in the Eurozone experienced tough times in 2008 and they had to make delicate choices as they faced a period of financial crisis. UK could have learned from the United States which responded to this crisis by coming up with a fiscal stimulus through making the most of the funds from the European Bank in an effort to boost its economic growth and consequently move away from recession. Instead Britain fully engaged in the austerity policies that ended up severely afflicting the initial crisis and choked any hopes of financial growth. The economic rational of austerity looks flimsy as there is no clear and workable theory on growth that underpins it and the tabled figures reflecting the situation in the private sector level of growth still needs a lot to be done for it to work. In addition, past economic crisis show that in no situation have austerity policies worked efficiently in the case that the total economic output is so much bellow the potential level (Stiglitz J., 2010, p.82). This implies that the current Britain government policy stands out as a giant economic experiment that is unprecedented. The claims of no scrutiny that the government of Britain has come up with are considered as not to stand up to any scrutiny. As the government keeps on insisting that it was painted to the corner, it becomes more likely if its plans fail to cut down on the deficit. The existing strategy by the government is looked at as being a golden shot, one that is nothing or all affairs. If this approach fails to work, then the government won’t have any alternative now that the bond market rates will result in a necessity to cut down on more spending. Bibliography Barrell, R and Liadze, I., 2009. “Fiscal Policy Effectiveness in the Banking Crisis”, National Institute Economic Review, 207 Barrell, R, Holland, D. and Hurst, I., 2012. “Fiscal Consolidation Part 2: fiscal multipliers and fiscal consolidations”, OECD Economic Department Working Paper No. 933 Delong, J and Summers, H, 2012. “Fiscal Policy in a Depressed Economy”, Brookings Papers on economic Activity 2012 Fatas, A., 2012. “Underestimating Fiscal Policy Multiplier”, blogpost, October Giles, C., 2012. Financial Times Holland, D and Portes, J., 2012. “Self-defeating austerity?” National Institute Economic Review 222 Lein, N., 2007. The Shock Doctrine: The Rise of Disaster Capitalism, Allen Lane: London Stiglitz J. , 2010. Freefall: Free Market and the Sinking of the Global Economy, Penguin: London Read More