Page 23 - Griffenomics

FACT: UK’S CREDIT RATING WAS DROPPED BY MOODY’S FROM ‘AAA’ TO ‘Aa1’
SPRING ISSUE GRIFFENOMICS
23
extent to which this should be achieved
by decreasing government spending and
increasing taxation.
The Chancellor of the Exchequer,
George Osborne, has set out the ambi-
tious target of completely eliminating
the UK budget deficit within the lifetime
of the current parliament, which lasts
until the 2015 election. He has enacted
two methods to achieve his target—tax
raises and spending cuts. The VAT was
increased to 20% in January 2011 while
income and corporation tax remained at
previous levels because increasing these
taxes may have aggravated negative eco-
nomic growth by reducing consumption
and investment in the economy. Most
importantly, Osborne announced a 6.2
billion pound spending cut in May 2010.
He stated that this was necessary be-
cause it would eƒectively reduce the bud-
get deficit and allow theUK to remain at a
trustworthy credit rating. A lower credit
rating would mean that the UK govern-
ment must pay a higher interest rate for
the debt issued.
On the other hand, the Labour Party
claims that the rapid spending cuts un-
dertaken by the coalition government
would threaten to damage the fragile
economic recovery by reducing Aggre-
gate Demand, which would cause a slow-
er rate of economic growth. The slower
rate of economic growth means that the
government would receive less tax rev-
enue in two ways. Since individuals are
earning less, they are likely to be spend-
ing less, meaning that the government
would receive less income tax and VAT.
Moreover, the lower consumption of
goods and serviceswouldmean that some
firms will earn less profit, and thereby
reduce the amount of corporation tax
that the government receives. Therefore,
not only would the government have
less money to repay its national debt, it
would also have to spend more on social
security due to the existence of cyclical
unemployment. Cyclical unemployment
is where individuals become out of work
due to a lack of aggregate demand in an
economy. In response to Osborne’s eco-
nomic policies, the Shadow Chancellor—
Ed Balls, announced in June 2011 that in-
stead of increasing the VAT, it should be
decreased to stimulate economic growth
and create more AD in the economy. His
policy, theoretically, would lead to more
consumption in the UK as people will
spend more on goods and services due to
a lower VAT.
So, who is right? The coalition govern-
ment with its contractionary fiscal policy
or the Labour Party with its expansion-
ary fiscal policy? Well, only time will tell.
This is because economics is a social sci-
ence, making it largely unpredictable by
even the best economists. But if there is
one thing that we know for sure, it is that
budget deficit reduction and stable eco-
nomic growth must come hand in hand.
FURTHER READING:
‘Austerity: The History of a
Dangerous Idea’
by Mark Blyth
‘Austerity: The Great Failure’
by Florian Schui
MINIMISING UNEMPLOYMENT
Pictured left, Job Centre provides job
opportunities for the unemployed
THE IRON LADY
Margaret Thatcher was
extremely supportive of
UK Austerity
“We used to think you could spend
your way out of recession and
increase employment by boosting
government spending”
JAMES Callaghan (Pm 1976-79)