Are the government’s fiscal plans a good idea?
Since coming to power in 2010, the coalition government has focused on cutting the deficit, aiming to have the structural current budget in balance at the end of a five year period, as well as public debt as a percentage of national income falling by 2015. The government is trying to meet these targets by raising taxes and cutting spending, but mainly by cutting government spending. This has the potential to have both a positive and negative effect on the UK economy, both long and short term.
For many reasons, this policy has the best future of the UK economy in mind. By reducing spending, taking on less debt and reducing debt as a percentage of income, the UK’s debt burden will be reduced. In turn, this will likely lead to lower interest rates, meaning that debt service costs falling, so that more expenditure can be spent on good projects, such as education, instead of funding investors. Currently running around £50 billion, this represents a good saving. It would also help to avoid the chance that the debt becomes too high to manage, potentially leading to a situation as in Greece, with international help needed and severe cuts put into place. Rating agencies, such as Moody’s, have recently cut the UK’s rating in part due to the high debt, showing that this is a good idea. All of this should put the economy on a more sustainable path, making it a good objective for the government.
In addition, the country will also likely see higher long term growth. As one of the main objectives for the long term, this is certainly something worth aiming for. Previous experience has proven this to be the case, with half of austerity programmes in the EU leading to higher growth in the past thirty years. Additional research studies have also shown similar results, with country’s who cut in recession seeing higher growth many decades later, especially if they are based on spending cuts, as with the current government. This means that the current actions could have a similar impact as the Thatcher restructuring in the 1980’s, setting the UK economy up for many decades to come. For example, crowding out effects should be reduced, enabling the private sector to be stronger and lead to increased investment and higher GDP.
However, there can also be many negatives as a result of the policy. This takes place because the economy is currently very weak, with reduced private sector demand. Traditional economic thought suggests that the government should be increasing spending at this time, helping to replace the lost demand and boost the economy. Instead, cuts put additional pressure onto the economy, meaning that many, including those who lose their jobs in the public sector, lose out. Living standards and welfare for many could fall, creating additional suffering. This can actually push the economy further into recession, making it harder to balance the deficit and cut debt, digging a deeper hole – especially if the private sector cannot pick up the slack. Depending on where the cuts are made, there could also be a long term impact. For example, if investment or education is cut, the potential output in the future could be harmed. Therefore, this policy can have severe downsides, creating severe short term pain.
Second, there are also problems with the implementation of the policy. This is because as the goal to balance the budget is a moving target, Chancellors who don’t meet the goal aren’t strictly breaking it, since they can always adjust the time period. As a result, credibility could be lost. In practice, this is seen, as according to the Tax Payers Alliance, many of the spending cuts promised haven’t actually been carried out yet, with this years borrowing only marginally below last years, showing that austerity isn’t really taking place. As a result, the country won’t see the benefits that are promised in the long term, decreasing the long term advantage.
Overall, it clear that the policy has a mixed impact, with both positive and negative effects. In the short term, the lower spending can lead to lower demand, increasing unemployment and falling living standards, so many suffer in the short term. As a result, there could be a lot of pressure put on the government, forcing them to change course, undermining the policy. However, if the government can successfully carry out the policy, a burden should be removed from the government, making it more sustainable. Evidence also suggests that growth will be higher in the long term, having an enormous impact on the UK economy, creating a solid foundation for the future. Therefore, it is clear that while there is short term pain, there is clear long term gain, making it a good policy choice, as long as spending is cut as planned over the next few years.