Thursday 21 April 2011

Osborne's answer to government debt - more household debt

The economic prospects for the UK and most of the EU do not look good.  There have been little, if any, signs of growth in the economy.  At this stage in the life of the government it would be reassuring to know that our triumvirate of Cameron, Osborne and Clegg had some alternative ideas of how to get us out of this mess.  However there is little evidence of this either.  Everything is focussed on reducing the government’s deficit.  All our woes are down to the last Labour government’s mismanagement by allowing all this government debt to rise and rise.  This of course is nonsense.  Without the rise in government borrowing the major banks would have collapsed bringing down the whole economy with them.  So most of the borrowing was necessary.  At some stage it should and will come down.   But in four or five years?
Such a massive contraction can only come about by reducing government spending in an abrupt and drastic way.  And such a contraction will inevitably have a knock-on effect on the growth prospects for the economy as a whole.  There are really only two ways in which the economy can grow in these circumstances.  The first is through a massive revival of exports.  The large effective devaluation of the pound relative to other countries is supposed to help this process.  However it also crucially depends on the rest of the world wanting to buy our goods and services.  While some other countries are doing quite well and there has been a slight growth in exports, there has been nothing like enough to compensate for the reductions in government spending.  Add to this the fact that key export markets such as the EU are also in the doldrums, suffering the same austerity measures as us in the UK.  The woes of the Eurozone economies are beginning to make the pound less competitive viz a viz the Euro.  So far, and we are now three years into a large devaluation of the pound there is nothing to support the view that export growth will alone revive our ailing economy.
The other way to compensate for reduced government debt is to increase personal and household debt.  And believe it or not this seems to be the Coaltion’s latest great white hope.  This is Alice in Wonderland economics.  Though that may be a tad unfair to Alice.  To get us out of the current mess, created in the main by our nasty Coalition, we all have to start spending more and more.  And this has to happen in a situation in which wages for those still in work are being frozen, benefits are being cut, while unemployment is forecast to rise.  In these circumstances the only way that private spending can rise is through individuals and households taking on more debt.  As Paul Krugman puts it - “So we have the spectacle of a government that inveighs against the evils of debt pinning all its hopes on an assumption that over-indebted households will dig their hole even deeper.”  Not an attractive proposition.  And one that is most unlikely to happen.  All the recent indicators show that household spending is not rising.  
All of which makes the prospect of a double dip recession that bit more likely.  Do our three wise men at the helm have any other ideas?  Where is Alice when you need her?

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