Osborne’s book-balancing a risky venture

June 24, 2010

BRITAIN-BUDGET/

-Tony Cleaver is senior teaching fellow in Economics and Finance in the Durham University School of Economics, Finance and Business. The opinions expressed are his own.-

George Osborne is taking a risk.

The Chancellor is also placing himself firmly in the orthodox school of financiers who assert that governments must balance their own books even in times of recession.

The Chancellor’s action to add to the squeeze on public finances already started by his predecessor (aiming to raise 40 billion pounds to the 73 billion pounds already provided for by former Chancellor Alastair Darling) and to reduce government borrowing down from over 10 percent of GDP to close to 1.1 percent in the space of five years implies kicking away the support of the UK economy that the country has desperately needed.

It is worth remembering that substantial government spending was called for after the 2008 credit crunch caused a collapse in the private sector that was at the time threatening a 1930s-like slump.

Without a compensating public sector stimulus, Britain like the U.S. and others was faced with the re-run of the Great Depression.

Has the UK private sector now recovered sufficiently to sustain its growth in the face of recently increased taxes and progressive cutbacks in government support?

If not, we are destined for a return to recession.

The budget is focussed on micro-economic incentives such as cutting corporation tax and stimulating small business start-ups; also reducing benefits for not working and reducing the size of the public sector.

So far, so orthodox.

But where is the market for the private sector to sell to?

The 2.5 percent increase in VAT is going to depress domestic demand at a time when households anyway need to cut back on their spending to pay off past debts.

And export markets in Europe and the USA are similarly not showing many signs of robust health.

UK manufacturing has shown an encouraging rebound in the first months of this year and the budget is careful not to tax it directly…but increasing VAT and cutting back public spending risks a double-dip depression in aggregate demand.

Chancellor George Osborne (2nd R), holds 19th-century finance minister William Ewart Gladstone’s old Budget box for the cameras alongside his team outside 11 Downing Street, before delivering his first Budget to the House of Commons in London June 22, 2010. REUTERS/Paul Hackett

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