It looks like the economic policy of our nasty Coalition - cuts, cuts and more cuts - is finally coming up against reality. A clutch of organizations, including the Bank of England, the Office for Budget Responsibility, the OECD and the CBI, have all revised downward their forecasts for growth in the UK economy.
It’s not hard to see why growth is going to be very hard to achieve. For example the IMF in its October edition of World Economic Outlook, offers a fascinating insight into how spending cuts impact on the economy. According to the IMF spending cuts of 1% of GDP can subtract as much as 2% from growth. Now this is likely to be the case for us in the UK because the usual factors which historically have mitigated the effects of spending cuts are absent here.
Firstly in previous cases countries have aggressively cut interest rates and devalued the currency. However that has already happened here. With interest rates at 0.5% there is no scope for them to fall further. Rather, all the indications are that they will rise sometime this year. The UK has also benefitted from a approximate 20% devaluation in the exchange rate of the pound. Further depreciation is unlike to occur in the near future, if at all.
Secondly, in all previous cases where spending cuts have been associated with economic growth this has come from a switch to exports. However there is little likelihood of growth in external demand for UK goods and services in the near future. Europe is, like the UK, in the middle of a period of austerity, Japan is still in the doldrums and the USA is about to start its own austerity programme in 2012. That leaves China, India and the developing world. Alas for us, all of the rest of the world will also be competing for what little export growth there is. For more information about the IMF paper, please visit Duncan’s Economic Blog.
Bear in mind that our nasty Coalition is proposing spending cuts of some 6% over the next four years. So unless something miraculous happens pretty soon we are in for a lengthy period of bad times. Remember also that these spending cuts are only now beginning to happen. The country as a whole has still to feel the full effects of the rise in unemployment, the wage freezes and the resultant loss of spending power for most people and families.
At this point is also worth remembering that all this talk of spending cuts and reduced economic growth means a real loss of services and lowering of living standards for most people in the country. For all their talk of efficiency savings and protecting front line services, cuts of the order planned by the Coalition can only lead to reductions in services or the actual loss of some services. Over the summer and autumn we will be begin to see exactly what and where these cuts will be.
It is also worth remembering that all this talk about how “We are all in this together” is just that - all talk. Further evidence of just how nasty the Coalition is. I still await with interest to find out just what Messrs Cameron, Osborne, Clegg et al, are going to have to give up, as a direct result of the spending cuts. Not to mention the chief executives and directors of our banks and financial companies. I don’t see many, if any, of them suffering much.
The only option open to the rest of us is to protest. Loud and clear and as often as possible. Let your MP know what you feel and let the likes of Cameron, Osborne and Clegg know as well. Write, email, join in any local protests and campaigns. A determined opposition can work wonders, just look at Tunisia and Egypt.