Does new economic data show that austerity does not work?

First topic message reminder :

Adding in new economic data shows that the so-called Austerity economic policy alone does not work. It's clear too me that its totally unsustainable as it destroys countries competiveness while draining confidence within business while driving down not only living standers that in turn shrinks demand. Do you believe the Tories will stick with there only economic policy up-to the next GE? if they do, I happen to believe most people will call time on the Tory party.





Growth Forecast downgraded for the Fifth time by (OBR in November 2011
Growth forecast Downgraded for 2nd Time by Bank of England 1.4% August 2011
Growth forecast Downgraded for 3rd Time to 1.7% (Budget 2011)
Growth forecast Downgraded for 3rd Time to by Ernst & Young from1.7% to 0.9% Jan 2012
Growth forecast Downgraded for 2nd Time to by CBI to 1.3% July 2011
Growth forecast Downgraded for 4th Time to by CBI to 1.2% Sept 2011
Growth forecast Downgraded for 4th Time to by CBI to 0.9% Feb 2012
Growth forecast Downgraded for 3rd Time to by I.M.F to 1.3% July 2011
Growth forecast Downgraded for 4th Time to by I.M.F to 0.6% Jan 2012
Growth forecast in the Tory budget down for a 3rd time to 1.7% (Budget 2011
Growth forecast in the City as low as 1.2% 2011
Disposable income has seen its Sharpest fall in 30 years or 1980s (ONS)
Annual Earnings Growth remains at 1.9% in February 2012
GDP The last cycle of robust growth in potential output of 2.9% was 1997 to 2006 (OBR & Oxford Economic)
GDP when the Tory-Liberal coalition come to power ,the UK was growing at an annual rate of 4% (OBR)
GDP sluggish at just 0.5% for April 2011 (OBR)
GDP City Growth forecast for 2012 are 0.3% to 0.4% (FT Sept 2011)
GDP Growth for forecast set by bank of England at 2.0% 2010
GDP Contracted by 0.5% in the Q4 in 2010 (OBR)
GDP is 0.8% lower than in November 2010 (OBR)
GDP IS 0.2% lower than MARCH 2011 (OBR)
GDP Growth Contracted by 0.5% Q4 2010 (OBR)
GDP Growth April 2011 was Q1 0.5% (OBR)
GDP Growth July 2011 was just Q2 0.2% (OBR)
GDP Growth starts Jan Q1 2012 at just 0.2% (OBR)
GDP Growth December 2011 Contracted by 0.2% Q4 (OBR)
GDP April's figures have just clawed back last years 0.5% contraction in 2010 (OBR)
GDP is 1.1% lower than the OBR thought it would be in Sept 2010 (OBR)
GDP Growth is now lower than 1930s, 1970s, 1980s 1990s (OBR)
GDP UK is 3.6% blow its pre-financial crisis 2008 (H.M.Trasury)
National Debt hits £1.03 Trillion for the first Time Jan 2012 (OBR)
National Debt actual debt after repurchase by Bank of England is £650 Billion (Guardian on B of E figures)
National Debt Coalition & Bank of England QE for 2011 was £75 billion (OBR/Bank of England)
National Debt Coalition & Bank of England QE for 2012 was £50 billion (OBR/Bank of England)
National Debt total Quantitative Easing is £325 Billion in February 2012 (OBR/Bank of England)
National Debt private + public sector debt totals some 500% 2011 (OBR & Oxford Economic)
National Debt Tory Party forecast National debt will fall by just £54 Billion by 2015 (Tory party website)
UK Economic Decline is two and half times that of the entire Euro zone (ONS & H.M.Trasury) 2011
UK Economic Decline is 77% of the EU’s decline for 2011 (H.M.Trasury)
UK Economy shrank by 5.0% in 2009 the biggest calendar year fall since 1921 ( NIE)
UK Economy shrank by 6.3% in 2011 the biggest calendar year fall on record by October 2011 ( NIE)
UK Pound exchange rate has fallen by 21.0% against the Dollar 2011 (H.M.Trasury)
UK lose market share accelerated from 2008 to 2010. (Oxford Economic )
Government Borrowing Tory-Liberal coalition come to power stated an additional £111 Billion 2009 (OBR)
Government Borrowing Net borrowing was just £7.3 Billion in 2010 (H.M.Trasury)
Government Borrowing forecast up by £54 Billion (Budget 2011)
Government Borrowing overshot in Q4 by £127 Billion (OBR)
Government Borrowing overshot in Jan 2012 by £157 Billion (ONS)
Government Borrowing topped the £10 billion by just Feb 2011 (OBR)
Government Borrowing to be £10 billion higher every year from 2012 (OBR)
Government Borrowing in Jan 2012 was £13.7 billion for December 2011 overshooting (OBR)
Private Pension deficit up from £24.5 Billion to £31.7 Billion by Sept 2011 (ONS)
Private Pension Deficit £158 billion December 2011 (ONS)
Private Pension deficit £255.2 form £222 billion in Jan 2012 (N.M.A & ONS)
UK 10 Year bonds, the Historical high of 12.84% set in April 1990 (H.M.Trasury)
UK 10 year Bonds, Record low of 1.97% set in Jan 2012 (H.M.Trasury)
UK 10 Year Bonds, Yields decline by 1.47% from 1989 to 2012 (H.M.Trasury)
UK 10 Year Bonds, averaged 6.28% (H.M.Trasury)
Unemployment up to record 17 year high (ONS)
Unemployment record was set in 1981 at 2.6 million or 9.8% of the Workforce
Unemployment for woman rose for the 10th month in a row March 2011 (ONS)
Unemployment increased by 20,000 the highest three month figure since Jan 1997 (ONS)
Unemployment is now 7.7% of economically active population March 2011 (ONS)
Unemployment forecast in the budget set to rise to 8.1% in 2012 (Budget 2011)
Unemployment is was2.6 million in March 2011 (ONS)
Unemployment is now 2.8 million in December 2011 (ONS)
Unemployment Claimants increased by 12,400 in March 2011 to April 2011 (ONS)
Unemployment Woman Claimants increased by 9,300 to 474,400 in March 2011 (ONS)
Unemployment Men Claimants increased by 3,100 to 994,200 in March 2011 (ONS)
Unemployment 16-24 hit 1.043 million in Q3, the highest since records began in 1992. 2011 (ONS)
Unemployment benefit payments rose by 1,200 to 1.6 million by December 2012 (ONS)
Unemployment benefit payments up to 1980s levels (ONS)
Business failures in 2010 was 23,000 (ONS)
Business failures in 2011 was 20,900 or 6.5% (ONS)
Bankers Bonus for £14 billion for 2011 (FT & Guardian & BBC)
Manufacturing was flat Feb 2011 (ONS)
Manufacturing production out put 1.5% decline in April 2011 (ONS)
Manufacturing touted as the engine of the economy fall by 0.3% in July 2011 (ONS)
Manufacturing jobless in Q4 2011 to Jan 2012 was up to 395,000
Manufacturing production Cable & Wireless Communication slumped nearly 17% in 2011 (FT)
BDOs output index dropped from Decembers 91.4% to February 2012 to 91.2%
Exports fell in Jan 2011 (HMCR)
Exports Vs Imports increased by 14.7% in October 2011 (HMCR)
Factory gate prices rose 0.9% between February & March 2011 (ONS)
Factory gate prices rose at an annual rate of 5.3% in May 2011 (ONS)
Factory gate prices in December 2011 to 4.8% (ONS)
Factory gate prices fell in January 2012 to 4.1% (ONS)
Factory gate Producers input price inflation in January 2012 is 7% (ONS)
Mortgage & Credit card debt will soar to £2,126 billion by 2015 (ONS)
Mortgage debt now accounts is around £21,000 per person April 2011 (ONS)
Home repossessions peak set in 1991 at 19,000 homes (council of mortgage lenders)
Home repossession forecast to rise to 45,000 in 2012 (council of mortgage lenders )
Construction industry suffered a 0.5% fall in output from November to January 2012 (ONS)
North sea Oil Tax up by £2 Billion for 2011, with HMCR taking 88% in Tax (ONS)
The Worst squeeze on living standards for 90 years
Consumer spending accounts for 65% of the UK economy April 2011 (OMS)
Consumer spending shows the biggest fell in total sales since the survey began in 1995 (KPMG)
Consumer spending has fallen by 1.7% for four consecutive Q in 2011. (ONS)
Personal Spending shows it first drop in personal spending power since the Thatcher slump in 1980s (KMPG)
Petrol down by 1p with VAT up by 2% in the Budget 2011
Petrol prices average increased by 52% up to March 2010
Food Prices rose 7.4% in the biggest rise since 2009 (ONS)
Food Prices rising at 4.9% rising faster than any other OECD in Jan 2012 member (UBS & OECD)
CPI Inflation increase to 3.3% December 2010 (OBR & Oxford Economic)
CPI has put the cost of living double its target from 4% in Jan 2011 to 4.4% in April 2011 (OBR & Oxford Economic)
CPI September 2011 rises by 5.2% (ONS)
CPI October 2011 fall by just 0.2% to 5.0% (ONS)
CPI January 2012 fell to 4.8% from 5.0% (Bank of England)
RPI has gone from 5.1% to 5.5% the highest since 1991 (ONS)
RPI Jan 2011 leapt to CPI 4% from 3.7% with Market Oracle putting real inflation at 6.6% 2012 .

boatlady wrote:Wondering why the (male) response to the very interesting posting by Bernadette on the Icelandic alternative has been a completely irrelevant bit on Jenny Eclair, a joke or two and otherwise ignoring this excellent example.
Are we feeling a little uncomfortable with the notion of a woman in power? Especially when she is leading an apparently successful economic recovery using only measures dictated by common-sense?

(Reminder)
by oftenwrong on Mon Sep 24, 2012 2:26 pm

It's all there for those who wish to see it, but how likely are misogynists Cameron and Osborne to take direction from a female Prime Minister of Iceland, Jóhanna Sigurðardóttir?

Hello boatlady,
I agree that Bernadette's post is excellent. I think that your assumption that the male members here on this forum are "uncomfortable" with women in power is unfounded. Of course many of us (as many women also do) is to look upon Thatcher as a woman who perhaps to some degree allowed power to go to her head and damaged the infrastucture of the UK and indeed the morality of the masses with her dog eat dog attitude and "make MONEY anyway you can".

Angela merkel for example IMO is an excellent leader, strong in the right way, as is Jóhanna Sigurðardóttir of Iceland.

As for Christine Lagarde, another woman of power, she leans far too much to the right to be seen as being a fair minded woman. Here is an example-
Christine Lagarde, the IMF boss who caused international outrage after she suggested in an interview with the Guardian that beleaguered Greeks might do well to pay their taxes, pays no taxes, it has emerged. That she in fact pays NO taxes at all.

A story given prominence in today's Sunday Times concerns David Harding, founder of Winton Capital Management whose annual income is £87Million. Mr Harding reveals that he pays 39% tax, amounting to £34Million, and declares that the rich should be able to pass the "smell test".

Who'll be the next to sit with the angels and reveal their 8-figure tax bill?

Hi Mel, I make no assumptions, but as I don't yet know anyone very well I just wanted to asdk the question, as the response to that particular posting seemed uncharacteristic.

The reason behind Austerity is reducing and clearing debt

In my own personal view, the problem is not austerity, but too much austerity.
The deficit must be addressed, it has to be repaired - paid off - reduced - cleared up, there is no question mark about this fact.

Imagine if you required water at a temperature of 67 degrees using a mixer tap, you would need to get the correct flow of hot water combined with the correct flow of cold water, get it wrong and you cannot achieve your goal, the goal been water at 67 degrees.

Reducing the nations deficit using austerity is a tricky method attempting to achieve a difficult goal - throw too many people out of work and your flow of income via taxation drops, and your flow of expenditure via welfare rises.

But its not just a simple matter of flow of income and expenditure, its also a matter of confidence, and confidence is like electricity in that you cannot see it, but you can feel it and measure it, and it makes a massive difference.

Too much austerity results in a huge drop in confidence, people stop spending, the car showrooms see a fall in business, as do the carpet shops, travel companies, estate agents and furniture stores, some go bust, others lay people off, and they all abandon plans to grow or expand.

Remember these words from April and May of 2010 :

"cutting too much, too deeply and too fast risks cutting off growth, it risks sending us back into recession"

And those words were said by Vince Cable, Nick Clegg, Danny Alexander, virtualy all Lib Dem MPs, virtualy every Lib Dem candidate.

they have been proved right

Quite right witchfinder. You forgot to mention A Darling who not only said the same thing (which those mentioned above copied) but had us back on the growth track.
Paying down the debt should have been made much less severe if it were treated long term or even medium term, similar to a mortgage term, then the same result could have been achieved without the pain. However, this was an excellent excuse for Tory ideology to prevail for one of many Tory sneaky reasons namely high unemployment creating cheap labour. It always happens under these Tory tyrants.

boatlady wrote:Hi Mel, I make no assumptions, but as I don't yet know anyone very well I just wanted to asdk the question, as the response to that particular posting seemed uncharacteristic.

Boatlady, you will find that on most threads on this forum there exists a few members who lighten up
the debate with some excellent humour/wit. Sometimes as we have seen here and you have pointed out
that the humour takes over and rather clouds some interesting postings. The same thing applies
when frequently the chatter takes everything off topic.
However, thank God for the humour, so dull without it IMO.

absolutely

Isn't it time for Keith Vaz to be put in control of the economy, in a coalition government there should be problem with cross party cooperation.

tlttf wrote:Isn't it time for Keith Vaz to be put in control of the economy, in a coalition government there should be problem with cross party cooperation.

also forgot to insert a definite or indefinite article which might have introduced some meaning into the message.

Re Keith Vaz - certainly seems he may have some Tory instincts

In my own personal view, the problem is not austerity, but too much austerity.

witchfinder. In my opinion, austerity does not work, full stop. It didn’t work for Hoover in the USA or for the UK national government in the 1930s, and it isn’t working now in the UK, since government borrowing is still increasing. Johann Hari summed this up in a nutshell:-

“Which countries have come out of this recession fastest? They are the ones like South Korea, which have had by far the biggest stimulus packages, paid for with (yes) higher debt. Which countries have fallen furthest and shattered most severely? The ones that tried to pay down their debts immediately with huge cuts.”
http://johannhari.com/2011/03/29/the-biggest-lie-in-british-politics/

I do wish that more people would unglue themselves from the UK politics board and take a look at what else there is on the forum. This thread covers the topic of austerity in more detail:-
https://cuttingedge2.forumotion.co.uk/t646-keynes-friedman-and-the-paradox-of-thrift-who-is-right

On the "Cutting Edge" forum there is The Politics Board ............

and then there are the supporting acts.

Raison d'être and all that jazz.

Ivan - I am always interested in what Johann Hari writes, but I dont always agree with his opinions.

It is true that the deficit crisis is grossly exaggerated, and most of his statistics concerning Britains debt are correct, but for as long as the deficit exists, it continues to add to the debt of the nation, the overall debt of the UK is now over £1 Trillion.

I believe that the deficit and debt issues need to be explained better to the British public because most people do not fully understand what the difference is between deficit and national debt, and they dont understand how national debt works, how it is paid off.

The problem is that if you have a permanent deficit, you can never pay off your national debt, and naturaly such a situation is not acceptable, it is not sustainable and can only lead to disaster - eventualy.

What most people dont understand is that national debt is continualy been paid back, even now as I type this, our national debt is been paid back.

HOWEVER - if the debt is been added to quicker than its been paid back, then we are on a road to ruin, if we were allowed to simply run up as much debt as we wanted, then we would all live like Kings in splendour and riches, but the truth is we cant.

one very important key to all this is growth - if we had sustained growth then the deficit and debt would automaticly shrink as a percentage of our GDP.

But whilst we are in recession we have negative growth, this is making the deficit and debt larger as a percentage of our GDP because in a recession our economy is shrinking.

The answer ( in my opinion ) is to take measures to put the deficit right but at the same time stimulate and encourage growth, and Ed Balls plan to build 100,000 new homes is just the sort of thing this nation desperately needs.

Sorry if this sounds frivolous, but I've never really understood who we are in debt to?
Will they send the 'boys' round if we don't pay?

Who are we in debt to ?

Some areas of capitalism make your head hurt, its a bit like that question "where does the universe end, or begin".

The government issues a piece of paper to a foreign nation or large bank and in return gets a sum of money, for arguments sake lets say £1 million, that piece of paper has a life expectancy of say 20 years, after that period expires the piece of paper is handed back to the UK and the UK then gives back the borrowed money ( £1 million ) plus interest, the bond holder ( the people who loaned the money ) have made a tidy profit via interest payments.

The strange thing is that nations who loan money, also borrow money, its rather like that song "money makes the world go around" or should that be "the world makes money go around", it all gets rather complicated, and hence why some people question the logic of the capitalist system.

That is the point at which you know for sure that the lunatics have taken over the asylum..... when a piece of paper is worth the salaries of a hundred workers.

Sorry if this sounds frivolous, but I've never really understood who we are in debt to?
Will they send the 'boys' round if we don't pay?.

Exactly!!!! Who are they????

In my opinion Recessions are created by politicians and the money men to punish the rest of us when we get too aspirational for their liking. This way they ensure property and land becomes cheap enough for them to snap up and control. They also make make sure commodity prices are so high that we cannot afford anything else other than day to day, month to month survival...That should put us back in our places.

Wow I almost sounded Leftie there

Thanks all three for your kind attention to my very ignorant question - Blue, be careful, you were starting to sound a bit left of centre.
I've always had trouble understanding economics and such, because the money supply seems to bear little relationship to resources we need to live our lives (food, raw materials, labour etc.)
I would expect a recession say after a drought which ruins the harvest, or if a vital raw material began to be in short supply. I can even follow the demographic argument, about too many retired people putting a strain on society, because this takes needed bodies out of the workforce and can cause a shortage of labour, but it doesn't seem anyone talking about the recession is claiming that any of those factors are really involved.
It makes me feel stupid that I can't understand what the issue is, so I will gratefully take on board your comments and apply them whenever I'm trying to follow these economic arguments.

It is a question I have heard asked over and over again to the people who should be able to give us an answer that us mere mortals can understand. Unfurtunately no one in the know has come up with a credible answer thus far. This is why I believe it was designed and orchestrated and I also find it interesting that many of the worlds big money players covered their backsides well before the sh*t hit the fan...I wonder how they knew!!!

The World is an imperfect place, as some people have noticed. There are obvious shortcomings in the centuries-old way in which we are governed by delegates. A necessary system in the days when London could be five days' drive away from a constituency, but no longer essential in these days of instant communication. Ordinary people are now so dis-satisfied with politicians that many have decided to take no interest in the matter, which leaves the rascals free to manipulate us as they choose.

Then there are the greedy, short-term speculators who create deliberate shortages so that the market price rises. Others "buy" a floundering business with borrowed money, repaying the loans by selling that company's assets. That class of person is uninterested in the well-being of humanity in general, and regards an income of £50 million as reasonable reward for their labours. Obviously such activities produce a few winners and many losers.

Ultimately, The Lord helps those who help themselves but the trick is to stop some from helping themselves to an unfair share.

A German tourist goes into a Greek hotel and places on the counter a 100 Euro note, he tells the hotel owner that he will go and look at one of the rooms and if it is to his taste, he will stay for 3 nights.

After the German goes upstairs the Greek hotel owner rushes off next door and uses the 100 Euro note to pay his laundry bill withe the owner of the laundry.

The man who owns the laundry rushes accross the street with the 100 Euro note in his hand and pays the butcher his outstanding meat bill.

The butcher goes down the street and knocks on the door of the local prostitute and pays her what he owes.

The prostitute then goes to the hotel and pays the hotel owner what she owes for renting a room.

The German tourist comes down stairs and tells the hotel owner that he will not be staying, he picks up the 100 Euro note and goes.

There is a moral to this story, but I havent a clue what it is except it must have something to do with debt, capitalism and money.

Well I may have some good news for you, tonights IMF report is hinting its got its maths wrong, instead of 1% cuts reducing growth by 0.5%, it appears to reduce growth by 1.7%. The masters of austerity fear a depression if America follows suit and embarks on similar austerity measures, they are subtlely saying to the developed world to slow down the cuts and avoid the anti-social, anti-democratic and debt default consequences of a global depression.

This just goes to show how big a mess the world's economy is in, Jesus.

"This just goes to show how big a mess the world's economy is in, Jesus."

He will know without you telling Him, Tosh. Jesus saves.

Tosh wrote:Well I may have some good news for you, tonights IMF report is hinting its got its maths wrong, instead of 1% cuts reducing growth by 0.5%, it appears to reduce growth by 1.7%. The masters of austerity fear a depression if America follows suit and embarks on similar austerity measures, they are subtlely saying to the developed world to slow down the cuts and avoid the anti-social, anti-democratic and debt default consequences of a global depression.

This just goes to show how big a mess the world's economy is in, Jesus.

It's all labours fault!

The most common phrase of the last two years

"the mess we inherited"

And allthough it annoys me every time I hear it, it actualy makes my blood boil when I hear Lib Dem MPs say it, because at least you know where you stand with a Tory, you know they want to smash up the NHS and hammer those people at the bottom, but the Lib Dems are traitors.

"the deficit we inherited"

But they forget to mention that virtualy every other major western industrialized nation did the same, were in the same situation, or that most similar nations actualy have debt levels higher than the UK.

The current total debt of the UK amounts to 62% of GDP (sept 2012), the current total debt of Japan is 194% of GDP, the United States and Italy both have higher debt levels than the UK.

Was the Labour government or Gordon Brown responsible for the financial crisis, deficits, recession and debt levels of Iceland, Greece, Portugal, France, Spain and all the other nations severely affected. ?

Labour really should have come up with a slogan to re-buff such bullshite by now you know! It makes my blood boil too!

Adele Carlyon - Yes I agree, I do think that the opposition front bench team should be on the offensive more than they are, but then I suppose looking at the opinion polls and the economic situation, do they realy need to. ?

As things stand the Labour Party have been accused by certain sections of the media, and the Tories of course, of not offering alternative solutions, though the Labour Party have always stated that making too many cuts, too deeply and too quickly would risk a return back to recession ( now there is a prediction and valid point which Labour have not capitalized upon ).

In reality Ed Miliband and Mr Balls are correct in saying that its too early to say precisely what they would do in two and a half years from now, because no one knows exactly what situation things will be in come May 2015.

I cannot help but feel that with the way things are, Labour should be between 15 and 20 points ahead in the opinion polls, though a constant 10 points will do I suppose.

Ivan's selection from "twitter" today:

"David Cameron is taking more money from the disabled than he is from the banks." (Yvette Cooper)

That's actually an understatement, since the Government made £80billion available to the Banks under the heading "Funding for Lending" at the beginning of August. Loans to small business and also mortgages are now readily available, but the effect (surprise, surprise) has been to reduce the Banks' need for deposits from the public. Interest rates on Savings Accounts have been reduced because it's cheaper to get funds from the BoE.

Well done Government, and all who sail in her.

This statement made me laugh out loud because it is two letters short, it should read the UK economy has "HEALED UP" thanks too Osborne and his cohorts and not forgetting the Yellow Tories. So far quite a lot of Economists have came out and said todays Autumn budget will do nothing to grow this economy any where in the UK, plus by January or February 2013 all the christmas temp jobs will be gone and all that means is higher unemployment figures and more misery for the people of the U K.

When oh when will the people of the UK wake up and smell the coffee, I tend to agree with OW Osborne is using smoke-and -mirrors and turning the workers against the unemployed the same people that his slash and burn threw on the "Dole Queue" we all know that the cuts in the public sector so that he could give Tory donors fat juicy contracts to his own kind in the private sector just like his cohort Landsley could hand over 49% of our NHS to the private health sector and we have all seen what that his done to the NHS nurses and doctors

I would also warn for the Education in the UK, Gove is intent on privatizing the education system, so in future we will have to pay through the nose for our kids to be educated not forgetting so not take ill because you will have to pay for that too and that includes a visit to your GP. .

Lots of links in this one - please see the original at http://skwalker1964.wordpress.com/2012/12/05/osbornes-5bn-cut-growth-plan-shows-perfectly-that-austerityinsanity/ for those. Thanks.

George Osborne’s autumn statement today signalled additional cuts of some £5 billion from public spending in order to fund a ‘growth plan’ of infrastructure spending and ‘business-friendly’ measures that he claims will kick-start the UK’s economy. The principal ‘savings’ come in the form of welfare & child benefit cuts (by increasing benefits at only 1% a year until 2015, well below inflation) and a further reduction of some 13,500 civil service jobs (on top of the 63,000 axed since 2010 and the 50,000 already planned for the next two years). The benefits measure will take some £4.5 billion from the welfare bill – money taken from the pockets of the unemployed, low earners and families.


The face of the man taking £4.5bn from the poorest while cutting corporate taxes, diverting money to private profits and screwing the economy up still more

Among the measures the cuts will fund are £1 billion spending on new roads, and a further cut in corporation tax from the 23% already flagged for 2013/14 (down from 26% last year) to 21% from 2014. Osborne wants us to believe that these measures show that he is “confronting the country’s problems” and will generate growth. But in fact, Osborne has inadvertently provided a perfect illustration of the insane, self-defeating nature of austerity.

Let’s look at the £1bn spending on new roads as an easy example. Osborne is cutting £4.5bn from benefits to the unemployed, low earners and families. If he didn’t make the changes he has announced, the £1bn to be spent on roads would still go to those people – and one thing you can pretty much guarantee about the unemployed, low earners and families (the Tories like to make out that all benefits go to ‘scroungers’, but in fact most goes to working people on low incomes) is that they’re going to spend every penny they get. They don’t have much choice – they have to, just in order to survive.

Let’s be cautious, though, and assume that 5% of the benefits paid to those low-income people is put away as savings, and so doesn’t go straight into immediate economic activity. The equation for the impact on the economy of that £1bn in benefit spending is straightforward:



£1bn of welfare spending injects about £950 million more or less immediately back into the economy. It’s a rough and ready calculation, but probably not too far off the mark.

Now, let’s take a look at that same £1bn spent on new roads instead of on benefits. Let’s imagine a fictitious construction company that has a road-building division. Let’s say, for the sake of argument, that pay to its workers accounts for 40% of the company’s costs. 40% is spent on purchasing materials or paying subcontractors and 20% is its gross profit. The maths for this situation (which I’m deliberately simplifying for the sake of clarity) would look like this:



The £200,000 of profit will be factored down by the company’s accountants to reduce the amount of tax paid on it, and companies are usually paying tax on their profits in arrears, at the end of the tax year at best and often later. But let’s assume that the company pays tax on the full £200,000 at the end of the tax year. At the new rate of 21%, this means that £42,000,000 will go back into the Treasury and can be spent on other things, and let’s be generous and say that all of that goes into the economy via some other route. That still means a loss to the economy of £158 million in profits that will go to private and corporate investors who will sit on the money indefinitely.

Not only that, but of the £400 million spent on materials and subcontracted services, the suppliers of those services will take out their own profit margins. Let’s say they also make a 20% profit – that means another £80 million in profits, and only £16.8 million paid in tax - in the best-case scenario.

All in all, in our simple, theoretical scenario, the £1 bn spent on roads instead of benefits turns into only £778.8 billion injected quickly into the economy, compared to £950 million if you spent the same amount on benefits for the unemployed, low earners and families.

This example is over-simplistic, and deliberately so. Profit margins will vary, the readiness of companies to pay tax and the speed with which they do so will vary, and there will be other factors affecting how much is re-spent, and how quickly, in either scenario. But the principles will still stand, whatever the actual percentages.

This basic calculation shows very clearly what George Osborne doesn’t want you to know. Spending on infrastructure will only boost economic growth if it is additional spending. Osborne claims that his measures are intended to be ‘fiscally neutral‘. But in that claim he’s the one being simplistic – he thinks that £1bn spent on roads built by private companies will inject the same amount into the economy as £1bn spent on benefits, so the net effect on government spending will be the same either way.

But sucking money out of one part of the economy in order to spend it in on anything in which a profit-margin is taken will inevitably result in less money circulating in the economy, as profits are taken and, in large part, saved or paid in dividends to overseas investors.

Since demand is everything when it comes to economic growth, less money going to those who will spend it immediately will suppress growth, not promote it. Since you’re suppressing demand, the very companies Osborne hopes (or claims to hope) will spend more because he’s directing money away from the poorest and into private pockets will end up retrenching, failing to spend and cutting jobs – because there will be less demand for what they offer.

That means private workers becoming unemployed, on top of the massive numbers of public employees (including those additional civil servants) – and an increased benefits bill. The vicious circle into which the UK has fallen since the Tory-led coalition took over will spin even faster and even more tightly, and we’ll all be worse off.

Osborne claimed today that “[Labour] think by borrowing more, they can borrow less”, but the obvious truth is that if you want economic growth in hard times, government has to be prepared to spend more – but this doesn’t have to mean borrowing more. Osborne is cutting corporation tax because he claims it will promote growth – but in the absence of demand, all it will do is fatten the bank accounts of a very few. And the fact that the rich are getting richer shows that the rich keep most of any extra rather than spending it, so any positive effect on the economy is minimal.

If Osborne really wants economic growth – which is questionable, because ‘crisis’ is such a good excuse for all sorts of the ideologically-driven measures that he and his mates love, dear boy – then the secret is to take more from the rich, who don’t spend it, in the form of taxation (whether by higher tax rates, more effective tax enforcement, or both) and give it to the poor who’ll spend it quickly and create demand.

Instead, he's taking at least £4.5bn away from them - and is already flagging the 'need' to cut yet another £10bn from the benefits total.

It’s basic economic commonsense, as well as being moral. Clearly George Osborne is lacking in both areas, but he’ll get an easy ride tomorrow in the majority of the press – he and they think we’re too stupid to know better.

The Press are probably relieved to have something to report which isn't about themselves.

Surely the UK will wake up now that Osborne has said that the low paid and those that have been flung on the Dole queue thanks to the Tory slash and burn until 2018 , they should be going to the B(W)ankers the ones that OWE this country so much MONEY they are the ones that should be paying through the nose after all it was the tax payer that bailed them out, instead it is the tax payer that is paying for it again with the loss of jobs in the public sector the NHS Police and armed forces. I am certain now the Tories are from a another planet or NAZIS in disguise.

Redflag.......

The banks p*ss me off as much as anyone else, but how much would you like to punish them before they all say 'F*ck it' we can just move our operations to the far east (as many have done so already)

The average overdraft in the UK is attracting 19% interest, according to a recent survey.

The Bank of England today retained Bank Rate at ½% which it has maintained for more than three years.

Bankers aren't going anywhere else whilst they can earn that kind of money here.

Incidentally, The Far East has problems of its own. The vast Chinese population has begun to comment on the extraordinary proportion of the very wealthy occupying positions in the Communist administration.

blueturando wrote:Redflag.......

The banks p*ss me off as much as anyone else, but how much would you like to punish them before they all say 'F*ck it' we can just move our operations to the far east (as many have done so already)

As far as I'm concerned the quicker they go to the far far east the better it will be for the UK, but before they go they have Billions to pay back to the tax payer and with no regulations to govern them they will do the same to the far east as they have done in the UK in 2008. Just after they decided to take our money for a night at the CASINO a top Economist said it would happen again if regulation was not brought in, and since Scam..er..on and his cohorts have no intensions of doing anything about it as most of these banks are large Tory donors so why would they kill the golden goose.

“George Osborne's savage attack on benefits is an affront to British decency”

Extracts from an article by Will Hutton:-

“Osborne is an economic illiterate. If households, companies and banks are simultaneously saving and building up surpluses, as they are at present, then someone in the system has to have a deficit to compensate, otherwise there is a downward depressive economic vortex. That someone necessarily is the government. Its deficit is the counterpart of surpluses elsewhere. Osborne could and should have used his autumn statement to give the private sector the confidence to invest, to borrow, to innovate and to spend and so run down its vast £700bn cash stockpile. He should have adopted a bold target for the growth of nominal income, launched a multibillion pound infrastructure programme and cheap loan guarantee scheme. Then the pressure on the government's own books would have been relieved.

He did none of these, instead believing that financial repression and shameful withdrawal of benefits are the triggers of recovery. The terms on which millions have made their plans and life choices have been torn up. The heart of fairness is to establish a proportional relationship between contribution and outcome to which everyone consents.

The bad luck of a broken family, unemployment, poor health, unexpected expenses of old age, mental illness and physical incapacity can hit anyone, however hard working. These risks confront everyone. A good society recognises these risks and insists they should be shared and insured against in an agreed system of collective insurance.”

For the full article and reader comments:-
http://www.guardian.co.uk/commentisfree/2012/dec/09/george-osborne-new-social-contract?CMP=twt_gu

QUOTE: "....If households, companies and banks are simultaneously saving and building up surpluses, as they are at present, then someone in the system has to have a deficit to compensate ...."


There is an obvious mis-match between the Chancellor's words, and his Department's actions. If the government is so poor that it has to cut Welfare benefits, why does it not encourage the public to save? A traditional home for "rainy-day savings" has always been N S and I Premium Bonds and Savings-Cerificates, but last year they were instructed that no further borrowing was required. NS&I had a target of ZERO. This year they have been set a target of MINUS £1billion, so people cashing-in savings will not be replaced.

"Austerity economics doesn't work"

Extracts from an article by John Cassidy:-

"Osborne said his austerity policies would cut his country’s budget deficit to zero within four years, enable Britain to begin relieving itself of its public debt, and generate healthy economic growth. None of these things have happened. Britain’s deficit remains stubbornly high, its people have been suffering through a double-dip recession, and many observers now expect the country to lose its ‘AAA’ credit rating.

Any decent economics textbook will tell you that cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase. Almost invariably, the end result is slower growth (or a recession) and high budget deficits.

Austerity policies are self-defeating: they cripple growth and reduce tax revenues. The only way to bring down a government’s deficit in a sustainable manner, and put the nation’s finances on a firmer footing, is to keep the economy growing. Spending cuts and tax increases can also play a role, but they need to be introduced gradually.

Before the last election, the UK’s economy appeared to be slowly recovering from the deep slump that followed the global financial crisis. Brown’s government had introduced a fiscal stimulus and GDP was growing at an annual rate of about 2.5%. Once Osborne’s cuts in spending started to be felt, however, things changed dramatically.

That austerity has led to recession is undeniable. Osborne places much of the blame on continental Europe, Britain’s biggest trading partner, but that’s a lame excuse. The proper reaction to a negative external shock is to loosen fiscal policy, not tighten it, much less tighten it violently."

For the full article:-
http://www.newyorker.com/online/blogs/comment/2012/12/austerity-economics-doesnt-work.html

Great post, Ivan. I'm not sure I'd agree that we have to have constant economic growth to reduce the deficit - because I'm not sure that constant economic growth is necessarily desirable or sustainable in itself, as we live in a finite world, and probably anything that outstrips the rate of population growth isn't going to be permanently sustainable. However, we do need to return to economic growth to begin with, as a proper Keynesian (and correct, IMO) approach is to reduce government spending when the economy is growing. You (and John Cassidy) are absolutely right that the misguided/malicious austerity policies are just sucking the life out of an already-ailing economy.

I'm tending toward the 'malicious' diagnosis these days.

It was helpful of Gideon to explain that there are likely to be six more years of austerity measures. That totals TEN stagnant years following the Credit Crunch of 2008. Anybody remember that? We voted for a change of government to put things right. (Well, I didn't but somebody musta.)