George Osborne, we are consistently told, is not for turning. There is no Plan B, not even a Plan A+, and the chancellor’s third Budget will stick to a tough programme of public spending cuts.
There is logic to this approach. Britain’s net debt has passed the £1trn mark and our debt-to-GDP ratio is edging up to 65%.
If anyone doubted the seriousness of the situation, the threat to the UK’s triple-A credit rating acted as a timely reminder. Osborne claimed the move to ‘negative outlook’ was a wake-up call and he reiterated the importance of ‘not wavering’ from the deficit reduction course.
But, generally, politicians tell us that with pain will come some gain (see Tony Travers’ feature, ‘This is going to hurt‘). The coalition has suggested that public sector cuts will act as a spur to the private sector. Unemployment will fall and growth automatically return.
However, the reverse has occurred. The jobless total has reached a 17-year high, while growth is back in negative territory. According to Bank of England governor Sir Mervyn King, we can expect the economy to zigzag from expansion to contraction over 2012.
And the UK is not alone. Across Europe, where fi scal consolidation has been the norm, economies are in the doldrums.
Italy and the Netherlands returned to recession in the fi nal quarter of 2011, joining Greece, Portugal and Belgium. In the eurozone as a whole, economic activity fell by 0.3% over that period.
Economic confidence has disappeared in many European countries to such an extent that consumers and companies are reducing debt and cutting back on spending. With governments intent on fi scal contraction, there appears no way out of this spiral of decline.
In the United States, however, a different economic policy has been pursued. President Obama’s administration has tried to delay austerity cuts and maintain a fi scal stimulus during the diffi cult times. As a result, perhaps, the US has upset the ratings agencies and lost its triple-A status.
But it has also achieved growth of 0.7% in the fi nal quarter of 2011, seenthe jobless rate fall to its lowest level in three years and experienced a boost to consumer spending.
There are still many problems with the US economy – not least its $15trn debt mountain – but it shows that there are economic and political alternatives.
The chancellor would do well to keep some options open on March 21, even if in so doing he incurs the wrath of the ratings agencies.
This article is published in the March edition of Public Finance magazine