1st December 2011
The shortfall is significant. The FT outlines the implications here: "Even with all the austerity measures, the OBR expects borrowing of £79bn in 2014-15, some £8bn more than it predicted in June 2010 before the coalition's first Budget."
There are plenty of people willing to blame the austerity measures. Notably it is the Opposition's central argument. Certainly the problem is weak growth and the austerity measures may have exacerbated that. Thom Brooks, an academic working in the areas of political justice and public policy at Newcastle university blogs: "What we might blame are the austerity measures — and, most especially, how these measures may have impacted on consumer confidence. Even if you have not had your job threatened, there is much insecurity to go around on job security moving forward into the summer as the austerity measures adopted by the present government begin to take effect. It has not helped hearing warnings from Kenneth Clarke that most of us won't know what hit us."
The US, which has postponed austerity measures has sustained growth. Recent economic statistics have surprised markets positively with jobless figures and GDP growth ahead of expectations. Even retail spending has been ahead of forecasts. This suggests that it may have been the UK's austerity measures that have dented growth.
This view is not confined to left-wing thinkers. The British Chamber of Commerce believes the austerity measures may be partly responsible: "The BCC blamed the slowdown in part on the government's austerity measures, as well as the crisis in the eurozone. The group says a recession will be avoided, but it is calling on the Chancellor, George Osborne, to take "bold measures" to improve infrastructure and help business and exporters."
However, it should be said that there are plenty of other potential culprits for weak growth. Much of the blame could be directed at inflation, for example: "The shortfall of growth up to now is largely the result of rising commodity and food prices, not matched by wage hikes, which have squeezed household incomes and made companies less willing to invest. "Most of the weakness can be explained by an external inflation shock constraining real household consumption, Robert Chote, chairman of the OBR, wrote in his forecasting report."
The Eurozone crisis is undoubtedly important: "Forget any talk about the U.K. being immune to the euro's woes. Trade with the rest of the world, and in particularly with the emerging BRIC nations of Brazil, Russia, India and China, might have grown strongly in recent years, but the euro zone is still the U.K.'s major trading partner, and the main destination for its exports. If Europe suffers, the U.K. suffers. Simple as that.
"Worse, it would be wrong to imagine the U.K.'s banks are off the hook. We have no real way of knowing what the potential liabilities are, or what losses will be created by the meltdown in the Italian, Spanish and now French bond markets."
Ultimately the UK's economic problems are multi-faceted and any suggestion that the solution is simple should be resisted. The UK's precarious economic situation has been likened to a narrow ledge on the edge of a cliff. On one side is a deflationary precipice; on the other is an inflationary precipice. Ultimately, policymakers must make their way gingerly along this ledge without slipping down either side.
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