Tuesday, 13 December 2011

Austerity doesn't work - it's going to get worse in 2012

George Osborne will go down in history as the Chancellor who provided the textbook example of how austerity will make a recession or economic stagnation worse. Almost every policy decision he makes is exacerbating rather than solving or even ameliorating the crisis.

Osborne's Autumn Statement on 29 November should have been the wake-up call for millions - including him - that austerity is not working. He is missing every single target he set, and every projection made by the Office for Budget Responsibility has had to be negatively revised. As a result of Osborne's austerity drive we will have lower growth, more debt, higher unemployment, reduced demand and no prospect for growth in the coming year.

Two reports in recent days have confirmed the bleak outlook for Osborne's auterity Britain. The Chancellor had already downgraded his growth prediction to 0.7% from 2.1%. The Standard Chartered Bank was predicting 0.6% growth for 2012 (similar to Osborne's downwardly revised figure), but on 12 December it changed its prediction forecasting that in 2012 the economy will now contract by 1.3%.

This is very bad news. It is bad not just because it means the UK will be back in recession in 2012, going on past form it is also bad because it will mean George Osborne will react by imposing more austerity - that was his reaction this time: raising the state pensions age to 67 by 2026, capping public sector pay at 1% for two years (on the back of a two year pay freeze), cancelling tax credit increases, more conditionality on welfare claimants, especially the young unemployed. This was combined with more tax breaks for business: more enterprise zones, 100% capital allowances in some areas, extending business rate relief, and confirming that corporation tax will drop to 25% next April.

The second bad report this week was the Manpower jobs outlook survey on 13 December, which surveyed 2,100 employers and found that four out of five had no plans to hire workers in the next three months - the lowest level for three years. New unemployment figures are out later today. Mark Cahill, Manpower's managing director, said:
"The 2012 jobs market sits on a knife-edge. In some ways this is a reflection of a weakening economy. We hear stories about companies hoarding cash and not investing, and we see a number of business sectors battening down the hatches."

But if the money in people's pockets is being outstripped by inflation and more and more people are unemployed, why would a company prepare for growth? Demand in the economy is being squeezed by cuts. The 710,000 public sector job cuts by 2017 that Osborne announced are not going to be picked up by the private sector unless it is confident consumer spending is expanding.

Despite the few high profile capital projects announced by the Chancellor, capital spending is down - affecting construction and the supply chain. Why would any private company build housing when everywhere outside London house prices are falling and the mortgage lending is less than it was in 2000.

George Magnus, senior economic adviser at UBS says:
"Households are trying to reduce debt, incomes are stagnant and we are losing jobs in a weak labour market. Fiscal austerity alone cannot be effective in this environment. You have to have growth and the litmus test of government policy is job creation."

Cuts beget cuts - and I haven't even considered the impact of the c.£160bn of debt that UK banks have to repay in 2012, which could well lead to a further systemic crisis.

2012 is Olympic year with London on show to the world, but it will also be the year when Osborne's Olympian economic fuck-up will be plain for all to see.

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