27th June 2013
Upfront austerity has proved counter-productive for the UK economy says Trevor Greetham asset allocation director of Fidelity Worldwide Investments as the Chancellor George Osborne unveils £11.5bn of spending cuts for the financial year 2015/2016.
Greetham says this contrasts starkly with the relatively easy fiscal policy in the US which is helping its economy grow its way out of debt.
As Greetham notes George Osborne has unveiled £11.5bn of spending cuts for the financial year 2015/16 as part of the austerity program aimed at reducing the budget deficit while Labour is pledging not to reverse Coalition spending cuts in the first year of a new parliament, although they have excluded possible increases in infrastructure spending.
Greetham says: “If the UK economy had grown as the authorities had expected back in 2010 there would be no need for the cuts announced today. Up front austerity has proved largely counter-productive with the consequent lack of growth hampering attempts to pay down debt.
“In stark contrast, relatively easy fiscal policy in the US is helping the economy to grow its way out of debt with the budget deficit already down from 10% of GDP at its peak to 4% for the current year. House prices are rising, banks are lending and the Federal Reserve is talking about raising interest rates one day.
“The US experience has triggered a sea change in attitudes on fiscal policy around the world. In a change of view, the IMF now argues that spending cuts should be spread out in order to allow economies to grow. Japan has tabled an outright increase in government spending despite a government debt to GDP ratio at more than twice the UK level. Even the euro area is giving the peripheral countries more time to make fiscal adjustments.
“Just as the rest of the world decides up front austerity is a bad idea, it seems the UK political establishment has agreed there is no alternative.”