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The Dead End Road Of Austerity

On Wednesday the Chancellor of the Exchequer will make his first Budget Statement. It'll also be the first Budget since Brexit. Pursuing a deliberate economic strategy outside the Single Market and the European customs union will require a complete reconfiguration of Treasury policy.
Toby Melville / Reuters

On Wednesday the Chancellor of the Exchequer will make his first Budget Statement. It'll also be the first Budget since Brexit. Pursuing a deliberate economic strategy outside the Single Market and the European customs union will require a complete reconfiguration of Treasury policy.

Despite record levels of employment and historically low interest rates; despite running a programme of deep spending cuts for the past seven years; and despite the highest burden of taxation since the 1980s, the British State will continue to run budget deficits for the foreseeable future. Despite promising that the so-called 'long-term economic plan' would eliminate the deficit by 2015, it is forecasted to be 0.7 per cent of national income in 2021/22 - more than a decade after Westminster first imposed austerity.

The Tories will tell us on Wednesday that the UK economy is the fastest growing economy in the western world, but there is a reason the Tories use the same statistic at every opportunity to make their case - every other statistic would paint a very different picture.

According to the IMF the UK had the fourth highest budget deficit and the sixth highest debt as a proportion of GDP of all the 28 advanced economies in 2015. This despite the past seven years being almost entirely focussed on deficit reduction. Any reasonable person would conclude that Westminster's great austerity experiment has failed.

The Chancellor on Wednesday must herald a post-extreme Brexit economic vision and outline what government intervention will be needed in future. Wales, with its export surplus and expansive trading relations with the European Economic Area is particularly exposed.

I fear, however that the Budget will be nothing more than a continuation of blind ambivalence - blinded by their Union Jack blindfold, the Tories' reckless austerity and extreme Brexit is pushing Wales ever closer to the edge of an economic precipice.

If the Chancellor, on Wednesday, is intent on sticking to his predecessor's failed experiment, he faces an uphill task.

Despite all the high-minded discussions and jargon, for the Chancellor generating economic growth boils down to four things:

1) Public investment;

2) Business investment;

3) Exports; and

4) Consumer spending

Public spending has obviously suffered severely under austerity and despite the clear failure to achieve the intended outcomes it seems inevitable that the Chancellor will continue on this path. There is certainly no sign of an increase in overall public spending.

Business investment in the UK has nosedived. For the first time since the midst of the financial crash year on year business investment is down. The UK is a laggard compared with its international peers. It is not that businesses are short of cash; it is that businesses are not investing this money - they are hoarding it. They are holding on to their pennies because of the economic uncertainty that has bedevilled the British State for many years. Nothing will cause more uncertainty for businesses than Brexit, and particularly the extreme Brexit being pursued by Westminster.

The Institute of Directors reports that about a fifth of its member companies are reining in expansion plans in the UK since the referendum - decreasing investment, delaying hiring employees or considering moving operations abroad, and who can blame them, when they do not know whether they will continue to be able to participate in the biggest free trade market in the world?

Severing our economic ties with Europe will also have a damaging impact on exports - an area where Wales is particularly exposed. Wales has a significant trade in goods surplus with the Single Market and we are able to export our goods to 53 other countries outside the Single Market, without tariffs, thanks to our membership of the Customs Union. Clearly abandoning these crucially important blocs will limit our exporting ability. No free trade agreement can possibly match the terms that continued full participation in the Single Market and the Customs Union offers.

With austerity continuing to starve public investment and the British State intent on tearing our economic links with Europe apart, creating yet more economic uncertainty and threatening exports, it seems as though the Chancellor will once again look to consumer spending, reflecting the policy of a long line of his predecessors.

But as the Institute for Fiscal Studies have already warned, the failed 'long-term economic plan' and the slow growth means that the tax burden is set to rise as a share of the UK's income to its highest level in thirty years. The slump in the value of sterling following the vote to leave the European Union means the pound in our pockets is worth less, and goods and services are more expensive.

All this boils down to even slower economic growth, meaning depressed wages and lower consumer spending.

We cannot continue on this dead end road of austerity. The long-term economic plan has failed and it is time for the Chancellor to recognise this.

He must use his Budget on Wednesday to chart a new course. A measure that the Chancellor could take is to create a 'Brexit Mitigation Fund', some of which could be earmarked to assist business to make the transition from the Single Market. It is too early to prepare a detailed plan but a commitment to such a plan might give business greater confidence to invest, particularly if the Chancellor could give a commitment that businesses will not face any increased barriers to trade post-Brexit.

A second leg of the Fund should be to boost public investment, but not at the expense of current spending on public services. For example, if infrastructure investment was boosted by one per cent of GDP for each of the coming five years this would amount to £100 billion across the British State and up to £5 billion for Wales. Such an approach would boost business confidence and investment as well as improving the UK's creaking infrastructure and help the UK break out of the cycle of increasing taxation and falling public spending it has experienced over recent years.

The Chancellor has an opportunity to break away from his predecessors' failed ideological experiment and set the economy on a different path - a path of equality, prosperity and hope.

It is not for a lack of options that the Chancellor finds himself on the dead end path of austerity but it is his lack of will that will keep us on the path of casino economics.

Change must happen, and if not now, at a time of such opportunity, then when?

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