As another Budget Day comes around, attention focuses as usual on the measures that Chancellor Osborne will announce. Will the 50% income tax rate be scrapped? Any chance of a mansion tax? What about cutting national insurance?
Behind it all, however, are much bigger questions: will the Coalition’s economic policies ever get this country out of the crisis that began with the collapse of Northern Rock back in 2007? And how will our economy and our society have changed as a result?
To see how the Budget debates affect our long-term future, we need to have a clear idea of what caused the crisis, and what the Coalition’s approach has been so far.
The immediate causes of the crisis are by now well understood. The global economic boom of the mid-2000s went out of control in an orgy of excessive lending, financial speculation and regulatory neglect. Banks were lending and trading, all over the world, on the assumption that growth was permanent and asset values could only go up, which left them very vulnerable when the US house price bubble burst in 2006. The consequence was that credit markets everywhere seized up, and banks found themselves with mountains of bad loans on their books.
Following the Lehman Brothers collapse in September 2008, governments had to step in with large-scale bank rescues, leading in turn to big increases in government budget deficits. As businesses and households struggled to cope with global recession and job losses, the world economy staggered along, only helped by the continuing growth in China, India and other emerging economies. Then ballooning budget deficits, first in Ireland and Greece and then Spain and Portugal, led to the Eurozone debt crisis that still threatens our prospects of recovery in Britain.
The Coalition government’s response can be summed up in one word: austerity. They believe that only fast and deep cuts in the budget deficit can provide continued access for the government to the bond markets, restore business confidence, and kick-start a strong recovery.
Their critics, now including many influential commentators like Martin Wolf of the Financial Times, argue that austerity is self-defeating, especially when it mainly takes the form of public sector spending cuts. As tens of thousands lose their jobs, their household spending has to be cut back. As a result businesses lose sales, and find that they too have to lay off staff.
While the private sector has created jobs in recent months, they are mostly part-time, and too few to make an impact, especially on the appallingly high level of unemployment among 18-to-24-year-olds. The Governments’ critics have
increasingly called for measures to boost growth, such as a State Investment Bank to fund improvements in our economic infrastructure. They argue that this would improve business confidence and get firms to start spending on the new capacity and new technology that we need.
But other critics suspect that the real reason for the Government’s obsession with spending cuts is that their long-term aim is to extend and deepen privatisation. They see profit-hungry firms circling the NHS and the schools like sharks, and they fear that the Coalition is bent on creating a dog-eat-dog society, in which the values of equality and social justice have no place.
by Hugo Radice