On 6th January George Osborne made a speech emphasising the threats to the UK economy in the coming year. His emphasis on the weakness of the economic situation might have come as a surprise to anyone who had listened to his autumn statement, where he was keen to trumpet how well the economy is doing, but Mr Osborne is a spin master above all else, and he clearly feels that the time has come for a different spin on our economy. The spin yesterday was all about the impact of the global economy on the UK.
The UK and US economies are growing at the moment, but growth in the rest of the world is looking very shaky. A down-turn in the global economy is bound to have an impact at home, and George Osborne’s austerity policies are not helping the UK to weather any potential global economic storm.
The biggest threat to the UK economy at the moment is not inflation, but deflation. Deflation means that any debt held by individuals or companies increases in value rather than decreasing over time. As a result deflation discourages spending and investment by individuals and companies, particularly the type of long term investment our country desperately needs.
There are several things George Osborne could do which would help to reduce the threat of deflation. The first is to forget his foolish commitment to hold public sector pay to 1% over the next 5 years. Allowing slightly higher pay in the public sector would be a big help in preventing deflation, and would also put money into the pockets of many middle income workers, who would spend it, thus supporting economic growth.
Allowing for public sector pay increases is costly, but the second thing George Osborne should do to help prevent deflation is to raise some taxes. This government has focussed all its efforts tackling the deficit on cutting spending. At the last election the Lib Dems were clear that at least as much emphasis should be on raising money as on cutting spending. This remains a sensible approach and there are a number of ways in which the government could raise money which would have a positive impact on the economy.
Finally Mr Osborne needs to relax the rules on council borrowing to allow councils to invest in council housing, as many are keen to do. House building is urgently needed, and councils are keen to take a lead, but the current rules prevent them from acting.
The Tories have made much of their ability to manage the economy. Some good work was done under the coalition, but it is in danger of being lost as George Osborne’s ideological drive to shrink the state drives policy in a direction which will also shrink our economy. We must make the case that the Tories are not only damaging our public services by their extreme austerity policies, they are also damaging our economic recovery.
* Lucy Nethsingha is Lib Dem Leader of Cambridgeshire County Council. She was MEP for the East of England from 2019-20. Her pre-politics career was in teaching, where she took a particular interest in early identification of Special Needs.
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4 Comments
Why is it that every time George Osborne slows deficit reduction there’s someone on hand to complain he’s reducing the deficit too fast?
the reason why deficit reduction is way behind the government’s schedule is because of the 3 years of stagnant growth in the last Parliament. Another economic downturn will put back further deficit reduction which is why the government needs a growth strategy. The best way to do that as the author alludes to is to put money in the pockets of those on low incomes who will spend proportionately more of their income on local goods and services.
Lucy,
I was quite liking the content of your post until I came across:
“……but the second thing George Osborne should do to help prevent deflation is to raise some taxes.”
No. No. No! Raising taxes like the way the last Government raised VAT to 20% was just the same, in demand management terms, as cutting spending. It was a stupid thing to do!
Raising taxes is required when the economy is overheating and there’s a need to slow it down. However, and as you rightly say, deflation is the problem and not inflation at the moment. Or we might decided to impose some extra taxes for social reasons like reducing alcohol consumption or reducing social inequality but we’d never impose extra taxes to try to “prevent deflation”.
That makes no sense at all!
@Geoffrey Payne,
The reason why the ‘deficit reduction’ strategy is behind schedule is simply because the Government is trying to achieve the impossible. That always takes a little longer than expected!
Cutting spending and increasing taxes (putting VAT to 20% for example) isn’t going to do anything to reduce the deficit but it is going to to reduce economic activity and so impact growth. We end up like a dog chasing its own tail as cutting spending reduces the tax take and the so deficit ends up little different to what it was previously.
Looking at the problem from another angle, we can say that if the UK as a whole buys more from abroad than it sells abroad then someone has to finance that deficit by borrowing. The government’s economic strategy is simply to say that it should not be government that does the borrowing, meaning that everyone else is encouraged to over-borrow instead.