The latest evidence showing UK disposable incomes fell last year by 1.2%, the biggest fall since 1977, together with marking down economic growth in the last quarter of last year to -0.3%, is a frightening warning that the UK may still, despite Ministers and the City puffing up the recovery, be heading for another recession – a bouble dip whether mild or more severe. The drivers are high energy prices, relentless government cuts, and the Eurozone sovereign debt crisis which, even if collapse has been averted, still seems likely to be headed for a recession in the Euro-area. The obvious question arises: how much worse has this got to get before Osborne is forced to change course? How long can he continue to crucify the economy on the cross of the bond markets?
There are two ways to cut the deficit. Osborne’s involves weaker (or even non-existent) growth, which means lower tax receipts and higher benefit spending, and by also dragging down aggregate demand it pulls growth down another notch, and the cycle starts again with the risk of a self-reinforcing downward spiral. That is a ver real risk when only 6% of the cuts have so far taken effect, and 94% is still to come. Indeed that is exactly what happened when this so-called ‘expansionary fiscal contraction’ was tried twice before in the last century. The Geddes Axe in 1923 and the May Committee in 1931 stifled growth, rocketed unemployment, and stalled recovery all the way to the Second World War.
The alternative way to cut the deficit is a jobs and growth strategy which would put the unemployed back to work, reduce benefit spending, and have a direct impact on growth in a way that quantititative easing and credit easing will never do. The only argument that Osborne has ever used against this strategy is that the bond markets would never stand for a rise in expenditure that increased the deficit.
But that is exactly what Osborne has just done by giving away £3bn to the super-rich, when there is not a shred of evidence to support the Treasury myththat tax avoiders will come flooding back home from Bermuda and Monaco in order meekly to pay their taxes because of a 5p cut. Equally Osborne has chosen to give away another £1.5bn to big business through the 2% cut in Corporation Tax, even though these businesses are already sitting on an unprecedented stash of £700bn, equal to half Britain’s entire GDP, which they’re not spending. Why? – because there’s no growth and aggregate demand is still falling. That £4.5bn that Osborne could have used instead, without in any way disturbing the bond markets, to generate a quarter of a million jobs. That could have marked the beginning of a real turnaround in the British economy. It is unforgiveable that the Tories are still determined instead to bleed the economy into the ground in order to push through at whatever cost their ultimate ideological objectives of shrinking the State, squeezing out welfare, and privatising whatever is left of public services.