Why Is the British Government Pursuing a Policy of Austerity While the Economy Is Not Growing - Essay Example

Why is the British Government pursuing a policy of austerity while the economy is not growing? College Lecturer [Word Count = 1,518] Introduction Since the coming into office of the Conservative-Liberal Coalition in 2010, the Cameron lead government embarked on an ambitious plan to deal with the UK debts in a five-year austerity strategy. This approach has since been criticized by economist and key players in the British economic system. One of the arguments put forth by critics revolves around the fact that the British government’s decision for this austerity policy was untimely (Flanders 2012). However, the government has stood its grounds under the chancellorship of George Osborne to pursue the austerity policy despite the fact that the UK economy has not been growing since its introduction in 2010. This paper seeks to examine the underlying reasons as to why the British Government has continued to pursue the austerity policy while the country’s economy is not shown any signs of notable growth. In particular, this discussion focuses on areas relating to massive budget deficits and public debts of UK. Besides, the paper looks at the reasons why the economic growth of UK has been stagnating despite the anticipated growth proclaimed by the Osborne theories. British Austerity Policy According to (Basu 2013, p.3) austerity refers to fiscal policies deployed by the central bank and the exchequer to help reduce government spending in a bid to trim down the national debt and trade balance. The common element of austerity policy comprises strategic cuts in public spending and incremental rise in taxation. In addition, this approach to economic trimming involves massive cuts in jobs as well as reduced support on government funded projects as reiterated by Stiglitz (2012). The same case is typical for the British situation in which the Chancellor of the British Exchequer introduced a five-year plan to help diminish the UK public debt to manageable fraction of the national GDP. The policy announcement came at a time when Britain was going through one of the worst recessions since 1982. The motivating force surrounding the radical policy of austerity introduced by Osborne revolved around the fact that the country’s public debt had reached a worrying level marked by down ratings to a point that the exchequer termed as a near bankruptcy. In particular, the UK budget had surpassed the £1 trillion mark by 2010 and there was uncompromising need to reverse the trend (McKee et al. 2012, p.347). Unfortunately, this came at time when the global recession had hit the country hardest marred with increased cost of living, increased unemployment rate and a drastic fall of demand in the local economy. These fundamental factors only made the situation worse fro which the coalition government resolved to austerity measures of expansionary fiscal contraction strategy of toning down the debt level. Considering the ideologies of the expansionary fiscal contraction, the austerity policy sought to increase taxes, cut down government spending and control the rate of external borrowing. As the external funding contracted within the targeted timeline, it was expected that the internal funds will undergo an expansionary effect with increased taxation and low spending. The surplus will offset the outstanding public debts and unfavourable balance of trade as argued by Basu (2013, p.4). The unfortunate reality is that, the British government will have to save a minimum of £15 billion annually in order to achieve the austerity target plan by 2015/16 fiscal year. The implication of this additional effort is that more aggressive measures must accompany the policy across all sectors of the economy including cuts in basic streams such as pension and welfare benefits. The impact notwithstanding the multiplier effect on low income earning indices, this austerity measures have seen the resort to cutting or abolishing a number of its quangos. While the measures continue to receive negative ratings and criticisms, local manufacturer are pushed top the walls in their attempts to absorb off-laid persons from the public sector. In one of the industry documents, the austerity policy deployed by the Osborne regime targets minimum job cuts of 1.3 million heads by 2015 (Meyer 2013, p.2). This will in turn reduce government spending on civil servant remunerations by at least £3 billion. Economist however argued that the idea is detrimental to economic growth. Beside, the move will see every household lose no less than £1,500 ever year. This is a significant cut in consumer spending, a counterproductive concept that is likely to impact negatively on the GDP (McKee et al. 2012, p.349). Since its inception, the austerity policy has seen the UK economy grow by less than 0.2% and the rate continues to register a downward trend. Studies indicate that the economic outlook of the current state of affairs would result in a projected drop in economic growth within the next three years (Stiglitz 2012, p.7). The irony is that, the government continues to borrow and augments id budgetary reserves by increased revenue collection yet these inflows of cash are not balanced by investment into the economy. As a result, the growing situation has culminated in what is commonly known economic stagnation with the 2012 GDP growth falling to 1.3 % from 1.7% in 2011 (MacLeavy 2011; Flanders 2012, p.3). The action has resulted in increased rate of youth unemployment to the tune of 8.3% in 2012 with a parallel economic contraction of 0.5 % for the last quarter of the fiscal year (Meyer 2013). On the other hand, manufacturing activities have shrunk as investors struggles to meet the ever rising cost of production. In the same light, the contraction of the domestic manufacturing should spur economic demand from import and push government sponsored industries to pursue self-funding modalities. These will enable the manufacturing industry to shift from subsidy dependency to a state of self-funding based on cheaper imports to support the domestic demand (Stiglitz 2012). Bearing in mind that the British economy is weak and fragile, any imbalances in the fiscal policies entrenched in the austerity policy would culminate in a state of slowed growth and increased ratio of debt-to-GDP. As it stands, the Osborne policy of austerity is projected to cause a higher ration of 80% by mid 2013. However, the contraction fiscal factor would fall to 3.5% of the GPD to spur a minimal growth of at least 1.3% in the current fiscal year (MacLeavy 2011, p.6). As investors and the private sector are still showing indications of willingness to spend, the British government takes advantage to implore higher income tax as well as corporate tax. This is expected to continue for the next few years. When the country reached an elastic limit where the investors are now unwilling to spend, the government would resort to its trading balance surpluses to roll out public spending (Basu 2013). This anticipated paradox shift will enable the country to avert its public debt and support the budge deficit from internal funding. From a different perspective, the UK exchequer anticipates that the bond yielding will grow with time. In his pursuit for economic stability, the government is trying to fiscally influence the productivity of the market bonds since the stringent measures will force the market to consider other avenues such as bonds and treasury bills to steer the prospects for progressive economic growth. According to Cassidy (2013), rising bond yields influences an increase in interest payments which eventually makes it rather difficult to trim down the primary deficit. With the increased austerity measures deployed by the British government, the exchequer has managed to keep its bond yielding on the low range. Similarly, the introduction of austerity measures to help cut government spending is hoped to trigger an upward push in private sector spending. This has seen more companies and SMEs struggling to create more jobs, pursue foreign trade and take an active role in trying to sustain the local economy. Unfortunately, the case of UK economy is too fragile and the observed increase in private sector spending has been short lived as investors finds it difficult to support the high cost of business amidst unrelenting bite of the global recession (Meyer 2013, p.5). As a result, the British economy has not recorded an impressive growth since 2010 when Osborne introduced the austerity measures. The increase in austerity measures deployed by the UK is offset by the cyclical interplay between unemployment and benefits spending. This emanates from the fact that severe reduction in government spending slows down the GDP and economic growth. As a result, the government would lay off many employees thus triggering an increase in household spending of benefits and welfare payouts. In the long-run, such austerity impacts negatively on production and economic spending of the private sector thus resulting in low reduction in government sending as initially anticipated by the actors of the austerity policy (McKee et al. 2012). To counter the adverse effects of these cyclical forces, the British government anticipates that reduced external borrowings and increased taxation will promote higher savings alongside the lower spending (Cassidy 2013, p.8). The synergy will result in a shrunken economy that the exchequer and the government can comfortably sustain with minimal public funding. It is in such analogies that the British government has continued to pursue austerity policy despite the slowed economic growth. References Basu, PK 2013, UK Needs to Rethink Austerity Policies, Accessed March 9, 2013 Cassidy, J 2013, The UK Austerity Economic Policy does not Work, Accessed March 9, 2013 Flanders, S 2012, Cameron Defends the UK Austerity Economic Policies, Accessed March 9, 2013 MacLeavy, J 2011, ‘New Politics of Austerity, Workfare and Gender: The UK coalition governments welfare reform proposals’ Cambridge Journal of Regions Economics & Sociology (2011) doi:10.1093/cjres/rsr023 McKee, M, Karanikolos, M, Belcher, P & Stuckler, D 2012, ‘Austerity Policy: A failed experiment on the people of Europe, Clinical Medicine, vol.12, no.4, pp.346-350 Meyer, H 2013, IMF admits the UK Austerity Policy was a Mistake, Accessed March 9, 2013 Stiglitz, J 2012, ‘Austerity: Europe’s manmade disaster, Accessed March 9, 2012 Read More