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Unprecedented Challenges: Managing Austerity in 2012

    In the second of the Centre for Policy Studies' 'UK Policy Resolutions for 2012' series, Dr. Tim Morgan - Global Head of Research for Tullett Prebon - looks at managing longer periods of austerity, as well as how the government can reward work through the tax system. Yesterday, in the first in the series, Lord Flight argued that it is essential for the UK to get ahead of the curve on deficit reduction. 

    UK Policy Resolutions for 2012:

    • Raise the income tax and NICs thresholds to £12,000 
    • Delayer public services
    • Restrict benefit entitlements to those in genuine need
    • Lift the red-tape burden

    The defining economic revelation of 2011, and the over-riding issue going forwards, is that Britain is much less well off than previously had been assumed by individuals and policymakers alike. I have been cautioning over this issue for a long time, my starkest warning being Project Armageddon: Thinking the Unthinkable, published in July.

    Most of the economic ‘growth’ of the decade before 2008 was illusory, being the product of private borrowing and public spending. This illusory boom has had two particularly adverse effects. It has skewed things in such a way that at least 70% of the economy, as currently configured, is trapped in an ex-growth lockdown. And public spending has been allowed to expand far beyond affordable levels.

    It would be difficult to exaggerate the political implications of discovering that we are far poorer than we thought we were. In normal times, the task of government is to share the proceeds of expansion between a gamut of economic and social constituencies on a basis most consistent with equity and continued growth. Difficult though it is, the process of sharing out prosperity pales into insignificance when compared with the challenge of apportioning economic deterioration.

    Part of this challenge concerns attitudes. There are those who believe that we simply need to borrow to promote growth, and to tide us over until the recovery returns. This is fallacious. The public probably assumes that a recovery will ‘turn up’ in the natural course of events. Given the severe structural weaknesses in the economy, the real question is not “when will the economy recover?” but, rather, “why and how will the economy recover?”

    Several factors exacerbate the challenge. The orientation of society towards materialist consumerism, a clear element in the wave of rioting in English cities during the summer, complicates the handling of a period of austerity which, as Mervyn King has observed, is likely to prove very protracted. Government needs to achieve a shift towards a less materialistic value-set at a time when the naked self-interest shown by public sector unions over the pensions issue, whilst not surprising, points to the potential division of society into warring interest-groups.

    Meanwhile, the political centre of gravity of the country – by which I mean working people on low- and middle-incomes – is suffering from a severe erosion of living standards, something which politicians ignore at their peril.

    An immediate problem for government is that state spending is simply too high. This problem is rooted in the structures of state activities. The quality of public services has not risen commensurately with increased spending, and the benefits bill has become unaffordable even though individual benefits are not, in themselves, over-generous.

     

    UK POLICY RESOLUTIONS IN 2012

    One specific policy priority for 2012 should be that government should seek to reward work, and to offset pressures on low- and middle-income working people, by raising the thresholds for income tax and National Insurance to £12,000, to be funded by additional cuts in public expenditures. 

    Three broader policy initiatives are also essential.

    1. The first is to delayer the public services, taking out entire management tiers whilst recognising that the fragmented model has failed.
    2. The second is to restrict benefits entitlements to those in greatest need.
    3. The third is to lift the burden on businesses, cutting not just red-tape but socially-well-intentioned interventions as well, in fields such as diversity, labour rights, and health and safety.

    Socially, as well as economically, the UK needs to move towards living within its means.

     

    Dr. Tim Morgan is Global Head of Research for Tullett Prebon Group Plc, where he is particularly interested in ‘Exponential Energy Economics’ (EEE). He is the author of Tullett’s ‘Project Armageddon: Thinking the Unthinkable’ publication and in 2011 authored ‘Five Fiscal Fallacies’ for the Centre for Policy Studies. 

    This article represents the views of the author only and does not necessarily represent the policy outlook of the Centre for Policy Studies, its board, staff or affiliated members.

    This afternoon, Dominic Raab MP looks at regulatory reforms that could be made in 2012 to encourage job creation. 

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    Comments

    James Harvard - About 2401 days ago

    If you want to really frighten yourself, read the Project Armageddon document (link in second paragraph). Contains details of how most of the sectors of the economy that were driving (comedy air-quotes) 'growth' before were doing so fuelled by debt in both public *and* private sector; I found this revealing and instructive as it's not something I've seen mentioned in mainstream debate.

    Pertinent phrase of the year for 2012 is "apportioning economic deterioration". Apportioning economic deterioration.

    Merry Christmas, everybody!

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