Bloomberg View: Why Austerity in Britain Has Run Its Course
The bad news never stops for U.K. Chancellor of the Exchequer George Osborne. On Dec. 5, he had to announce that economic growth this year will fall below zero and the country’s debt will go on rising as a share of the economy even longer than he had pledged.
Osborne’s midyear budget statement was the moment for him to relax austerity and introduce convincing measures to stimulate the anemic levels of investment and growth that now threaten long-term damage to the economy. Unfortunately, Osborne continued to play the role of Iron Chancellor, arguing that to loosen fiscal policy now would spook markets, drive up the U.K.’s low borrowing costs, and put it on “the road to ruin.”
In lieu of real change, he proposed a set of well-intentioned but ultimately insignificant policies, restricted by the need to make the package as a whole fiscally neutral. Osborne did not need to be this cautious.
The chancellor did act to redirect government money in a few ways likely to produce growth. He said he’d reduce the nominal rate of corporation taxes to 21 percent from 24 percent in 2014 (compared with 35 percent in the U.S.). He also increased by a factor of 10 the amount of capital investment that U.K. companies can make exempt from taxes each year, to £250,000 ($402,300) from £25,000.
Osborne scraped together £5 billion to spend on schools, transportation, and flood defenses. He also set up a body to eliminate the regulatory gridlock that’s blocking development of shale gas in the U.K. and promised tax breaks for exploration, ahead of a new policy aimed at increasing Britain’s production and use of natural gas. These are all intelligent ideas that may boost construction and employment in the near term, and growth in the longer term.
The scale of the projects, however, is too small to be significant. The Ernst & Young Item Club, an independent group that examines U.K. budgets, figured that the £5 billion infrastructure package might increase growth by 0.2 percent. It recommends a package of similar spending worth £14 billion.
We don’t argue with Osborne’s original decision to embrace austerity—the hole that the banking crisis blew in the U.K.’s finances was huge. Yet a lot has changed over the past two or three years, and Osborne should recognize it. If he sets out a clear plan to bring down debt in the medium term, the benefit of his bid for credibility is that markets will probably believe him and understand the need to give a modest boost to the economy as growth stalls. In the next few months the British chancellor should use the trust he has built to ease austerity’s grip.