Osborne looked to special interests, not the UK’s perilous state

The Autumn Statement showed that George Osborne has failed to grasp the gravity of the economic crisis facing the UK. Urgent action was needed to brace the economy for double-dip recession and the fallout from the euro crisis. Instead, the chancellor announced a big increase in government borrowing, together with a series of measures that, while attractive to key groups of target voters, will do little to encourage growth.

Worse still, collapsing growth means the government’s deficit reduction plan is now in tatters. Government borrowing has been increased by £110bn over the next four years, meaning a staggering £350bn added to the national debt.

This may in fact be a best-case scenario. The Office for Budget Responsibility predicts slow growth of 0.7 per cent in 2012 but then assumes a healthy recovery, with growth rising to 2.1 per cent in 2013, 2.7 per cent in 2014 and a robust 3.0 per cent in 2015. But given the severity of the euro crisis, high levels of public and private debt, and the possibility of a downturn in overheated emerging markets, it is equally plausible that Britain will go into recession next year, followed by several years of stagnation.

A wise chancellor would be preparing for such a scenario. Vague talk of contingency plans does not pass muster.

A double-dip recession would decimate tax revenues while adding to welfare spending through higher unemployment. If UK GDP were just five per cent lower than predicted in 2015, for example, this would reduce the annual tax take by around £35bn.

Under such circumstances, with the budget deficit remaining unsustainably high, the chancellor cannot assume that the UK will retain investor confidence and continue to pay very low interest rates on its debt. With high debt and low growth there may be little to separate Britain from the struggling economies in the rest of Europe, such as Spain and Italy.

Given the severity of the potential risks, Osborne should have had the courage to announce further cuts – at least enough to return the deficit reduction plan to its original trajectory. He should also have taken far bolder steps to encourage growth, through radical deregulation and by rationalising the tax system.

Read the rest of the article here.

Richard Wellings was formerly Deputy Research Director at the Institute of Economic Affairs. He was educated at Oxford and the London School of Economics, completing a PhD on transport and environmental policy at the latter in 2004. He joined the Institute in 2006 as Deputy Editorial Director. Richard is the author, co-author or editor of several papers, books and reports, including Towards Better Transport (Policy Exchange, 2008), A Beginner’s Guide to Liberty (Adam Smith Institute, 2009), High Speed 2: The Next Government Project Disaster? (IEA , 2011) and Which Road Ahead - Government or Market? (IEA, 2012). He is a Senior Fellow of the Cobden Centre and the Economic Policy Centre.

2 thoughts on “Osborne looked to special interests, not the UK’s perilous state”

  1. Posted 01/12/2011 at 10:07 | Permalink

    Talking about special interests. It seems that across the pond, a special groups of interest, an euphemism for rotten bunch of crooks, got together and agreed that it was in the best interest of everyone to decide to flood the markets with money.

    Being so nice as they are, it seems pretty obvious that they shared their intentions with a selected group of people:


  2. Posted 03/12/2011 at 12:38 | Permalink

    A sobering assessment of Britain’s economic future. I was particularly interested in this section of Dr Wellings’ column: ‘Additional enterprise zones were announced, even though these subsidise firms to relocate to sub-optimal locations. An extra £1bn was found for the Regional Growth Fund for England, despite five decades of failure in regional policy and governments’ lamentable record at picking winners.’

    Nova Scotia receives ‘equalisation’ payments as a have-not province—federal funds intended to provide comparable social services across Canada as have provinces. However, the argument is made in peripheral regions that such monies pool in the capital of Halifax—already a hive of activity due to government offices and strategic Atlantic location—and never make their way to those areas where the transfers are arguably intended. Strike 1.

    To redress this issue, it has been suggested that the province should offer ‘tax-free policies’ to businesses located in these areas which, I would argue, cost the government nothing (nothing, that is, if you consider profits to belong to the people and not to the State). As one would imagine, such proposals will go nowhere, as the intelligentsia far prefers Crown corporations for development to manage the micro-economy according to their own lights. Strike 2.

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