Britain's sullen economic mood
John Rapley, Contributor
While Washington's game of chicken continues, with the president and congressional Republicans daring one another to drive over the fiscal cliff, Britain is settling in for another winter of discontent. As the temperature drops in London and frost gathers on the panes, the chancellor of the exchequer issued his Autumn Statement to Parliament.
In America, they're bickering over how to stimulate the economy. Democrats want to do it with public spending; Republicans with tax cuts. Here in the United Kingdom, the argument is over whether to stimulate the economy. While the opposition Labour Party insists the country needs a Keynesian spending package, the governing Conservative-Liberal Democrat coalition is pushing austerity all the way.
The austerity is widening the fissures in British society. The chancellor, George Osborne, is cutting welfare spending but protecting pensions. Conservatives cling to images of welfare-scroungers and cheats, on one hand, and virtuous and thrifty pensioners on the other. The image of the impoverished elderly person hunched under a blanket by an ebbing coal fire lingers durably.
However, poverty in Europe is now becoming increasingly a young person's lot. Pensioners are just as likely to be caravanning in southern Europe. In truth, Britain's pensions, like those of most Western societies, have become unsustainable. That they are being defended at all cost probably owes less to principle than politics: the Conservatives are only too aware that young people are less likely to cast a vote for them than retired people.
Is the time right?
When the Conservatives took office two years ago, they inherited a heavy debt from several years of carefree Labour spending. There's no question that Britain had, like all Western countries, been living beyond its means. The question is, therefore, not whether cutbacks are a good thing, but whether the timing is right.
For, as Mr Osborne revealed in his statement, the economy is going nowhere. It is more or less flatlining at the moment, and the government predicts modest growth for next year. Given the tendency of governments to bump up their figures, even that expectation may be optimistic.
Perhaps a majority of economists take the view, like Labour or the US government do, that the economy needs stimulus in the short term, austerity later. In this view, borrowing now to put the economy back on a growth path would enable the government to raise taxes painlessly and pay off the debt later.
The contrary view, held by the Tories, is that cutting the debt now will keep long-term interest costs down. As the cost of government comes down, investment will pick up. The problem for Mr Osborne, and more broadly for the government, is that, so far, the strategy doesn't seem to be working. The economy is still going nowhere, and the government is being forced to cut more and more as its tax revenues fail to recover.
TWO SIDES TO AUSTERITY
In fairness to the Tories, the expectation that a Keynesian stimulus can restore the economy to the growth rates of old is probably too optimistic. The chances that any rebound will be merely what is dismissively called a 'sugar high' are considerable.
It seems inescapable that Western societies are going to have to get accustomed to slower long-term growth rates. Most Western governments are in denial of this, and so are merely kicking the can further down the road. The British government can at least plausibly claim that it is facing up to the difficult decisions now, so that it doesn't have to confront them later.
The Tories may have a point. However, the government's great failing may not be that it is pursuing austerity, but that it is pursuing inequitable austerity. If it continues to protect its constituents while letting the scalpel fall on those of its political opponents, it will only further shatter a broken model. That could yet win them an election. But it will lose them history's verdict.