Coalition deficit reduction, too far, too fast?

The deficit reduction program has been the flagship policy of the current coalition government- it was because of the need for such a reduction that the coalition was formed and it is of vital importance for the economic wellbeing of the county. However due to the unstable global economic situation the coalition must balance the need for growth with the desire to cut when reducing the deficit, and the Labour opposition has often accused the government of failing to achieve this balance and cutting “too far, too fast” thereby damaging the economy and stifling much needed growth. Overall the statement is correct, the deficit reduction programme goes too far and too fast despite coalition claims.

A great demonstration of the fact that the deficit reduction program goes too far, too fast is the severe lack of growth in the economy. After the first three months of 2012 the economy entered into a “double-dip recession” meaning that growth actually decreased by 0.2%, much of which was the direct result of the government’s actions. The dramatic rise in VAT from 17.5% to 20% had a great impact on the economy; as the price of goods increases people wages have remained constant and so much needed consumer spending, already low because of the initial crisis, was pushed even lower, damaging many businesses and stunting growth. Also, while many of the cuts have not yet been implemented, the knowledge among public sector workers that many of their jobs will have to be cut has created a culture of fear, again reducing consumer spending and damaging growth, and the recent cuts of the government quangos have demonstrate that when the public sector cuts do hit things will only get worse. Cutting finances to local councils restricted a major player in many local economies. Overall these measures, while certainly bringing in more money to the treasury and reducing the national deficit, have completely stunted growth through a mixture of taxes and lack of consumer confidence. If a more measured approach was taken which prioritized maintaining growth as well as reducing the deficit then growth would not have been adversely affected.

However many in the government argue that there have been significant measures to promote growth accompanying the cuts and that the allegation that their policies prioritise only the deficit is unfounded. At the recent G7 meeting David Cameron stated that “austerity and growth are two sides of the same coin”, and George Osborne claims that fast and far-reaching deficit reduction is vital for any growth to be meaningful and not just lead to uncontrollable inflation. However coalition policies aimed at inspiring “growth” to soften the impact of the deficit reduction are meaningless as they only benefit big companies and not smaller businesses. For example smaller business have only been given a 1% cut in corporation tax whereas big business has achieves 2% decrease for three consecutive years with an additional 1% reduction scheduled for 2013, and corporation tax was one of the coalitions flagship “growth” policies. Small measures such as tax breaks for big business and further deregulation (the other main coalition “growth” policy) cannot take the place of necessary growth schemes.. Labour argues that the re-introduction of the bank levy could free up billions of pounds to create jobs and that this would be a far more suitable way to pursue growth. It is the coalition’s zealotry in reducing the deficit in a unsustainable manner that prevents them from adopting such a policy and only further reinforced the fact that they are cutting too far and too fast without any accompanying growth policies to soften the impact.

Another major symptom of the fact that the government cuts are happening too far and too fast is number of unemployed, which has reached a 17 year high at 8.2% in January 2012, much of which is again a direct result of government cuts. With the reduction in consumer spending many businesses have been forced to close or downsize, causing large job loss within the private sector as a result of the cuts. The public sector will also soon see heavy cuts with an estimated 500,00 jobs to be lost. In addition to unemployment from private downsizing and public cuts, youth unemployment is also a great contributor to the figures. As times becomes harder for business they are less able and willing tp hire new workers, making finding a job for a young person, even with a good degree an increasingly hard prospect. The abolition of EMA is considered by many economists to further complicate youth unemployment, and many young people are now left with no means of income aside from unemployment benefit, creating a dependency on the state. The government claims that they are attempting to tackle unemployment in a suitable way for example they are investing £50 million inyto projects to help firms come with skill shortages and that a lot more money is now available for apprentiships and vocational skills. However these measures are clearly failing to have a significant effect on the bigger pitcture of unemployment, which ahs steadily increased and will most likely continue to do so as the public sector is cut and the private sector is unable to takeover.

Despite all of this the coalition government continues to maintain that their cuts are vital fort the economic recovery and the wellbeing of the country as a whole. The allegation that they have come too far and too fast is merely Labour rhetoric and Ed Milliband does not have any concrete alternatives to reduce the alarming levels of national debt. The most important thing for Britain to maintain is market confidence and that cannot be done without a credible austerity package. Britain AAA status has repeatedly come under threat just as France as other European countries have been downgraded and it is vital for Britain to maintain this status if it is to avoid the financial disaster that has overcome Europe. The cuts also take care not to unduly harm the economy- the IFS has forecast that the changes in tax actually benefit most household and the government is willing to invest billion is growth schemes, whereas Labour’s proposals seek to spend money the country simply does not have.

However these claims do not add up to the facts. Other countries such as the USA have not cut anywhere near as fast as the UK, and as demonstrated by the recent gloomy forecast by the IMF too much austerity in a climate of little growth does not install the market with confidence, it actually spreads fear. If the markets were being boosted and supported by the cuts then we would be seeing growth and lending, instead we see businesses falling with no new ones to take their place and banks refusing to lend. And in the midst of all of this the coalition is now attempting to make huge cuts to the public sector while expecting the already desolate private sector to create the necessary jobs- an unrealistic notion that is further damaged by the growth-stifling cuts. In short the notion that the extent of the cuts is necessary and beneficial has no value.

To conclude the coalitions defecit reduction programme certainly cuts too far too fast. In the private sector we see little growth and massive unemployment all as a result of the cuts, while the government maintains that large swaithes of the public sector can somehow be replaced by the ailing companies of the private. The ciuts are unpreciednted compared to the rest of the world and even the IMF has warned that if growth continues to plummet continued austerity on such a large scale can only damamge the economy. A more moderate plan for cuts accompanied by extensive growth plans would benefit the economy far more than the current coalition policy of cutting everywhere possible as soon as possible, which many prominent economists such as the Institute of Fiscal Studies  have predicted are unlikely to achieve government goals and expectations.

Nicholas Ttofis

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