Plan B or Not Plan B

This week’s blog looks at the current fiscal situation for the UK government and asks whether it is now time for plan B and if so, what it should look like.

As the IMF have reported, the UK’s economic recovery has been more sluggish than was hoped for a year ago. Specifically, the needed change from public to private sector led growth has not yet materialized.

The IMF predict inflation will continue to come down to more “normal” levels. The same cannot be said, however, for unemployment or public sector borrowing and debt figures.

Consequently there are now serious doubts being raised as to whether the government’s debt reduction targets will be met. Indeed, there is the very real danger of a vicious circle being created.

This will occur if a lack of growth depresses tax revenues whilst simultaneously increases the costs of unemployment. This will then cause the public debt position to worsen still further, consequently requiring even more austerity, reducing likely future economic growth and threatening a further negative spiral for the economy.

In these circumstances it is unsurprising that many commentators and politicians have called for an alternative, growth-based, focus to move up the policy agenda. This is the so-called plan B alternative to the current austerity focus.

The problem is that whilst calls to ease the austerity measures in a bid to stimulate growth, have been made, the government has effectively put all of its eggs into the “monetary confidence” basket. They argue that the austerity measures cause the markets to have confidence in the UK, that this confidence allows the UK to enjoy very low interest rates, and low interest rates will stimulate private sector investment and ultimately growth.

Unfortunately this is currently not seemingly working, with the banks are reluctant to lend and companies finding it very difficult to access funds, negating the impact of the low interest rates. So far the quantitative easing of the Bank of England has had only a limited effect, hence the more recent policies to try and encourage the banks to lend more.

In the past, a Plan B would have involved increasing government spending on infrastructure, housing etc. As the multiplier effect on demand in the economy is relatively strong via the construction industry. The government is, however, unlikely to fund much if anything additional, though there are signs it is looking at supporting infrastructure projects through guarantee schemes.

The government is unlikely, therefor,e to move to a plan B for growth. Perhaps a Plan Ab is on the cards, with the government adjusting its activities to subtly put more emphasis on the growth side of the equation.

Ultimately the government is trying to generate more optimism in the economy in order to stimulate private sector growth. The problem is that it is also trying desperately not to actually spend government money on this, because of the very fiscal situation that is contributing to the growth problem.

Ultimately, Plan B will require the private sector to significantly pick up the reins of creating the growth in the cconomy, and this will place a heavy burden on the entrepreneurship and innovation of business in the UK. For the confidence required to return to the private sector in the UK, however, it will probably require coordinated action from the most important (G20) government and countries in the world economy, not just the UK.

In this increasingly interconnected and “globalised word economy”, that would, however, be the real signal that there is a Plan B for growth.

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