This isn’t how David Cameron’s austerity program was supposed to work. When he took office in 2010, the British prime minister announced deep cuts in public spending, promising that the temporary pain would protect the country’s credit rating and restore its economic health.
Three years later, the economy looks sicker than ever, the Fitch and Moody’s ratings agencies have stripped British sovereign debt of its AAA grade, and the government’s budget deficit still sits at a worrisome 7 percent. “Fiscal consolidation has got stuck in the mud of near-zero [gross domestic product] growth,” David Tinsley of BNP Paribas in London said after the Fitch downgrade on April 19. Fitch said it expected continued sluggish growth through 2014.
Cameron’s countrymen are all-too aware that things aren’t working as planned. Unemployment rose to 7.9 percent in the first quarter, real wages are falling, and businesses aren’t investing, despite record-low interest rates. In a program earlier this year, the BBC coined the term “precariat” to describe the country’s burgeoning underclass. Even the austerity-loving International Monetary Fund said this month that “it may be time to consider adjustments to the original fiscal plans.”
What kind of adjustments, though? Cameron and his chancellor of the exchequer, George Osborne, blame the situation on the debt crisis in the euro zone, the biggest market for British exports. On April 19, a Cameron spokesman said the government planned to stick to the economic course it has set.
But critics say there are some things the Conservative Government could do to spur growth without risking a large jump in the budget deficit, which was at more than 11 percent when Cameron took office.
The simplest would be a dose of investment in infrastructure such as roads, bridges, and schools, says Simon Kirby, an economist at the National Institute of Economic & Social Research in London. Such projects create jobs and spur business investment, yet don’t add significantly to the deficit because they are financed by long-term borrowing, he says. And with record-low interest rates, the projects would be a relative bargain.
“They don’t have to be big, flashy schemes,” Kirby says. “There are smaller-scale projects that you can get off the ground almost immediately.” One example: widening the mostly two-lane highway that connects London with Hastings in southeastern England. Traffic congestion now turns that 55-mile trip into a multi-hour ordeal.
A further quick boost to growth could come from loosening rules on immigrant visas, which have been significantly tightened under Cameron. The Conservatives’ coalition partner, the Liberal Democrats, contend that the restrictions are driving away potential investment and dampening trade.
“If we are serious about trading more with countries such as China, then we must make sure our borders are as open as possible,” Business Secretary Vince Cable, a Liberal Democrat, wrote in a recent article in the Daily Telegraph. “Yet in the last five years, our share of Chinese visitors has been dropping.”