19/07/2012 09:48 BST | Updated 18/09/2012 06:12 BST

Austerity is Not the Right Strategy

The British government's economic strategy is in tatters.

On the one hand the Chancellor, the Rt. Hon. George Osborne has just offered assurances to the private sector that the British taxpayer will guarantee £50bn of new infrastructure investment and exports.

On the other, the coalition's deficit reduction programme has largely been implemented by - wait for it - massive cuts in infrastructure investment. This at a time when Britain - in contrast e.g. to China - invests far too little in the public infrastructure that supports and enhances private economic activity.

By slashing public infrastructure investment the Coalition government is cutting the legs off Britain's race to recovery, and undermining its ability to compete in the global economy.

The contradictory approach to investment exposes deep flaws in the economic ideology driving austerity in Britain, Europe and the US - an ideology plunging western economies deeper into recession. No wonder the governor of the Fed, Ben Bernanke was so downbeat last week. And no wonder the British PM promises years of doom and gloom to his electorate.

It gets worse: the Chancellor's new proposed £50bn taxpayer guarantees may well prove more expensive than direct public investment, because the government will be guaranteeing private sector borrowing, currently much higher than public sector borrowing.

In this sense, the Chancellor is copying the costly PFI strategy of the Labour government - a strategy which Coalition ministers were keen to disparage only a few weeks ago.

The Coalition's taxpayer guarantees for private investment follows immediately on from yet another £80bn taxpayer subsidy to Britain's private banks. However the former - taxpayer guarantees for private investment - are heavily conditional on projects taking off soon - and delivering results for the Coalition before the next election in 2015.

While these public subsidies may offer some solace to the depressed private sector, the greater risk is that the Prime Minister's 'gloom and doom' predictions will further depress private sector confidence, discourage private investment plans and cancelling out the promise of taxpayer guarantees.

Austerity - slashing public investment at a time when private investment is inhibited by a vast overhang of private debt and by a heavily indebted and broken banking system - is indeed a disastrous economic strategy, both for Britain, the Eurozone and the US.

No wonder therefore that the UK economy has shrunk by a massive 4.4% over the last four years, while the Eurozone economy shrank by 2% and the US has only grown by 1.2%.

By contrast China, which has used both monetary and fiscal policy to support private sector activity, has had more than 9% annual average growth throughout the four years since the crisis began in 2007. China, which responded rapidly to the collapse of the western financial system, mounted a massive fiscal stimulus in response to the crash. The stimulus amounted to 13% of GDP in 2008. This contrasts with the UK's weak stimulus of 1.5% of GDP and the US's 2009 fiscal stimulus of 5.9%.

China's public investment policy has been good for business. Above all, it has been good for public finances. Chinese fiscal revenue in 2009 soared by 11.9%, whereas tax revenues collapsed for both the UK, the US and the Eurozone saw tax revenues collapse.

China might be slowing down - but slowing down to about 7% increase in GDP is a record that Britain's politicians can only dream of.

Instead the British Prime Minister offers only the nightmare of 20 years austerity.

Ann Pettifor is Director of PRIME Economics