When will Tories admit their ‘growth strategy’ isn’t working?


1:10 pm - May 11th 2011

by Sunny Hundal    


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The political media has largely ignored the Bank of England report today but its sentiment is stark, and illustrates how badly Osborne is getting it wrong.

The BoE has cut its growth forecasts for the UK economy again, and says the short-term outlook has deteriorated. As we’ve been saying here for months, that means Osborne’s “growth strategy” is failing miserably. And why…?

It is failing because there isn’t much demand or household confidence in our economy. And why might that be? Thanks to Osborne’s massive spending cuts.

So we’re back to the mantra the left has been chanting from day one: cuts now will jeopardise our growth and make everyone worse off. And it’s turning out to be true.

The Bank of England estimates that in 2012 GDP will be around 2.2%, down from an earlier estimate of close to 3%. That is a massive fall and equates to millions billions of pounds.

As the Financial Times points out today, the medium term pace of growth is also under threat.

Of course, all this will also impact our ability to pay off the deficit and the national debt. Less growth means less tax revenues and higher unemployment, which means a higher deficit.

Perhaps its time Ed Balls brought back the “growth deniers” rhetoric – it certainly suits this government.

Update: Duncan Weldon points out this equates to all the revenue raised through the VAT rise:

0.3% might not sound like much. But growth 0.3% lower in 2012 could add about £12bn-£14bn* to the deficit (split between fiscal years 2011/12 and 2012/13).

£13bn is coincidentally rough what the government raised by increasing VAT from 17.5% to 20% in January.

In other words the slowing of the economy could totally erase the fiscal effects of a regressive tax increase. There can be no more vivid illustration of the importance of growth to reducing the deficit.

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About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


1) They won’t.
2) Neither will the mainstream media.
3) The people voted. They are big, tall and ugly enough to know what you get when you vote for the Tories.

2. Mr S. Pill

@1

did the Tories get a majority in the general election then? Did most of the public vote for deep and fast cuts? I must’ve missed that…

3. Dick the Prick

Governmental ability has become limited. It’s all very well arguining for maximums without aknowledging that the EU is absorning cash and hang on a minute!Budgets are being changed to reference carer details so politics clings on, again.

4. DisgustedOfTunbridgeWells

As we’ve been saying here for months, that means Osborne’s “growth strategy” is failing miserably.

Wrong, it means it’s functioning exactly as intended.

Well, since +2.2% is growth (and indeed quite noticeable growth – for every 50 units of GDP this year, there will be over 51 next year under this prediction) I don’t think we can say the growth strategy is failing. Perhaps not accelerating at the pace required, but that is a different matter.

Indeed – slow and steady growth out of a recession might not be a bad thing with the possibility of higher inflation around.

“The political media has largely ignored the Bank of England report today”

Just shows how the vast majority of the media is in the tank for the Tories.

It seems that our Pip Squeak chancellor’s great strategy to ‘shrink our way to growth’ is not working. But when you have the media covering your backside it is soooo easy to get away with it.

The Tories don’t care about growth they just want the rid of the welfare state. If a full blown 1930s style depression would be “a price worth paying” to do it.

What I find so illuminating is the implicit refusal of government supporters to focus on the very basic point from keynesian macroeconmics that to maintain aggregate demand for good and services consumer spending, business investment and net exports must increase sufficiently to make up for the cuts in public spending.

If, for whatever reason, that doesn’t happen then aggregate demand will fall and some producers won’t have a market to that extent. The perpetual reversion to blaming Gordon is blocking soundly based economic analysis.

A related issue is whether the banks are making sufficient loans to SMEs to finance business expansion – from this it seems that high street bank lending to small businesses has been declining:
http://www.telegraph.co.uk/finance/yourbusiness/8503268/Santander-to-lend-150m-of-cheap-EU-money-to-SMEs.html

Btw try out this from Wednesday’s FT: Pace of UK growth under threat:
http://www.ft.com/cms/s/0/1e1ff056-7b41-11e0-9b06-00144feabdc0.html#axzz1M6Zl5OKi

There have been several occasional warnings, including some from Mervyn King, that one of the possible unwelcome downstream consequences of the financial crisis is that the fundamentals of Britain’s economy may have changed so that future capacity to grow could have been reduced. If so, capacity contraints will limit real GDP growth.

There. Is. No. Alternative.

Public spending is a deeply inefficient mechanism to fuel growth. It also postpones the evil day when the credit card bill has to be paid – and saddles the nation with even more debt.

Thank fuck we have the international money markets to maintain discipline. If they weren’t there then loons like Sunny and Ed Balls would drive the UK into Greek levels of economic dysfunctionality.

Osborne is pursuing the only strategy that makes sense and enough Brits grasp that to ensure that the Coalition will have time to see it through.

@Dave

Sheer Lunacy.

There are plenty of choices.

Thank fuck we have the international money markets to maintain discipline.

How undemocratic of you. Thankfully extremists like you remain wholly outvoted.

Osborne is pursuing the only strategy that makes sense

Which is why GDP growth has gone backwards, unemployment is rising and the deficit is going to be maintained – with all the knock on effects for Borrowing that has.

In other words, you don’t know what you’re talking about.

“Osborne is pursuing the only strategy that makes sense ”

That is just untrue.

The speed at which the legacy deficit is reduced through public spending cuts matters because that affects GDP growth and tax revenues.

There is a question about whether a policy of paying down the deficit in the course of this current (? 5-year) Parliament is the sensible option. There are further issues about whether the current choice between public spending cuts, tax increases or measures to reduce tax avoidance is the best option.

The repeating claims: There is no alternative, as with the Thatcher governments of the early 1980s, is just nonsense. In the case of Thatcher, after many such proclamations, the Medium Term Financial Strategy was formally abandoned in the autumn of 1985.

“£13bn is coincidentally rough what the government raised by increasing VAT from 17.5% to 20% in January.”

Just out of interest (and in order to quote it!), over what period does that figure apply to? One year?

I can’t think of a better illustration of the cuts/tax/growth equation than shoddy progress on the economy equalling a huge tax rise.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    When will Tories admit their 'growth strategy' isn't working? http://bit.ly/jY5KFs

  2. Helen Thomas

    RT @libcon When will Tories admit their 'growth strategy' isnt working? http://bit.ly/jY5KFs <Never. That would mean admitting they're wrong

  3. Dave McDave

    RT @libcon: When will Tories admit their 'growth strategy' isn't working? http://bit.ly/jY5KFs

  4. sunny hundal

    When will Chancellor George Osborne admit his UK 'growth strategy' isn't working? http://bit.ly/jY5KFs

  5. Susan Thorne

    RT @sunny_hundal: When will Chancellor George Osborne admit his UK 'growth strategy' isn't working? http://bit.ly/jY5KFs

  6. Double.Karma

    RT @Hellsbells265: RT @libcon When will Tories admit their 'growth strategy' isnt working? http://bit.ly/jY5KFs <Never. That would me …

  7. michjperry

    RT @sunny_hundal: When will Chancellor George Osborne admit his UK 'growth strategy' isn't working? http://bit.ly/jY5KFs

  8. Emily Davis

    RT @libcon: When will Tories admit their 'growth strategy' isn't working? http://bit.ly/jY5KFs

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