How the government is really helping the UK economy

September 6, 2012

The government’s latest plan to boost growth by relaxing planning permission rules has attracted a mixed reaction. In fairness, allowing homeowners who have detached houses to build an 8 metre long-extension is never going to get the UK economy out of the bolt hole it has found itself in. Likewise, the perceived U-turn on the plan to build another runway at Heathrow is unlikely to happen in time for Cameron and Osborne to take credit for the growth boost.

But all is not lost for the government. All it needs to do is to continue its policy of gently loosening the Treasury’s purse strings. “But we are going through a period of fiscal austerity,” I hear you cry. Indeed that is what the government wants us to think, but the economic data just doesn’t support that assertion. The latest GDP data reported that government spending was flat in the second quarter. That is down from the large 1.9% increase in the first quarter. However the UK’s fiscal consolidation effort looks fairly meagre when you consider that government spending has only fallen once in the last six quarters.

Home extensions or no home extensions can’t compete with the purchasing power of government when it comes to boosting the economy. Thus, if the government  decides to loosen its fiscal targets at the Autumn Budget statement in November (even at the risk of losing the UK’s triple A credit rating) as some believe is likely, the UK economy could be in a good position for 2013.

But is that really a good economic move for the long-term? Most politicians in Western Democracies know that we can’t keep up the level of public spending or debt accumulation we have been used to. However, not that many are willing to tackle the problem head on. The UK government has bucked this trend, and staked the Chancellor’s reputation on reducing our debt levels and dependency on public spending during this parliament. Osborne is finding out the hard way that it’s easier said than done to take things (read benefits) away from people who are used to them. He found this out to humiliating effect when he was booed at a Paralympics medal presentation ceremony.

This is in sharp contrast to other countries. Japan has never made much of an effort at reigning in its public debt; hence its debt-to-GDP ratio is more than twice the size of its economy. Likewise, the US has managed to avoid tax hikes and harsh fiscal austerity, preferring fiscal stimulus in times of economic hardship, which has helped the US economy. The OECD expects the UK economy to contract by 0.7% this year compared to its forecast for the US economy to grow by a fairly healthy 2.3%.

Osborne must be looking at the US figures in envy. If he could only back-track on his promises and boost spending by a couple of per cent for the rest of this year then it could help his popularity levels and potentially help the economy get out of this wretched double-dip recession.

However, the government needs to decide what is more important: to be popular and thus win another term at the next election or to help the UK economy get onto a more stable fiscal footing. You can imagine which choice a politician would make.

The government’s attempts to boost growth through relaxing planning rules or building a new runway at Heathrow may attract criticism, but since they are fairly fiscally neutral they should be lauded as examples of how the government is trying to stick to its pledge of fiscal prudence.

While government spending is a short term way to boost growth, with overall public debt now standing at more than £1 trillion in the UK, the government may soon run out of credit. The truth is that fiscal consolidation is hard. The UK is finding that out right now, the US and other western democracies that have bucked the deficit cutting route will find out the hard way sooner or later.

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