United Kingdom: Recent Example of the Failure of an Austerity-Only Policy

Austerity is a popular word among a number of politicians but there is increasing and consistent evidence that a government policy based exclusively on austerity just doesn’t work. This is doubly true for developed economies as was most recently proven by the United Kingdom whose government implemented a policy rich in austerity and, consequently, saw economic growth literally disappear.

Data recently released by the British government shows the country’s economy failed to grow last year, despite the added boost of the 2012 Olympics. Even more shocking is the fact that the economy actually shrank in the fourth quarter thereby wiping out what little growth it had seen in the first three quarters. This essentially means that the impact of the Olympics, which took place in London from July 27 – August 12, was negligible and, after the tourists departed, so did the economic growth.

Clearly, Downing Street’s emphasis on growing the manufacturing sector at the expense of the consumers has not succeeded. While focusing on long-term economic growth through manufacturing is a good idea, its not effective if it happens in a vacuum. This is especially true for developed economies since they are the consuming engines that drive the growth in the developing countries; for example, Chinese economic growth does not depend on the Chinese consumer but the global consumer.

The United Kingdom is in a precarious position since its economy isn’t big enough to grow within itself and its biggest trading partner – the eurozone – is also stuck in a recession. This – combined with the government’s schizophrenic policies – caused the UK to have the worst economic performance since 1830, reduced the size of the economy from where it was 15 months ago, raised the fear of stagflation and/or a triple-dip recession and generated threats of credit rating downgrades from the rating agencies.

Clearly, the government’s existing policies aren’t working and even pro-austerity institutions such as the International Monetary Fund and Goldman Sachs are urging London to change its course. Downing Street, however, remains steadfast as it goes blaming companies for not paying taxes while asking multinationals to come to the UK because of the country’s lowered tax rate.

The UK needs to implement a multi-track economic policy, one that follows the US path and includes stimulus spending focused on infrastructure and capital projects. If there is one truth that can be learned from the variety of solutions implemented by the multitude of nations that have stared down the recess of economic hardship, its that giving more money to low and middle-income households is a good thing.

Clearly, there are no easy answers but Downing Street needs to change – or at least amend – its economic policies before things get even more dire and the British get their own Tea Party. That may be the biggest tragedy of all!