More evidence today that the UK’s austerity budget will end up hindering economic growth more than it will help. The Guardian has reported that up to 1.3million jobs will be lost in the next five years according to Treasury officials.
On average that is 600,000 jobs in both the public and private sector so no one is immune. But conversely the Treasury has announced that it believes the private sector will be able to create 2.5million jobs during this same period. They think that they can do this despite a cut in public spending and job losses that will result in fewer government contracts and unemployed people who cannot spend money.
John Maynard Keynes argued that in times of depression or recession public spending should increase and taxes should decrease, which is the exact opposite of what this Government has proposed. This may seem counterintuitive so let’s break it down.
Local government has more money to spend on, say, fixing local roads. In order to do this they must hire a contractor to perform the work. The contractor hires employees of all levels from labourers to project managers. Potentially more jobs are created or, at the very least, no jobs are lost and the business continues to succeed and maybe even turn a profit. With taxes being low, people can have more ‘disposable’ income allowing them to buy goods and services from other businesses and the cycle continues.
Conversely, let’s consider my situation with the current austerity budget. Let’s say I buy a cup of coffee every day from the local coffee shop on my way to work. It may just be one cup of coffee but my £1.70 a day, £8.50 a week, £34 a month, £408 a year adds to their profits. If I am taking home less money due to tax increases or, worst case, lose my job because of the public sector spending cuts then that local business may lose my custom. They make less money and that in turn affects the success of the business. To a certain degree, the phrase “you’ve got to spend money to make money” is appropriate here.
The New York Times has reported on Ireland’s austerity measures of two years ago and how it has affected the economy. They swiftly introduced public spending cuts and tax increases in an effort to reduce their deficit. In doing so, Ireland saw its economy shrink and remained in recession until this quarter. It was announced just today that it has finally moved out of recession; however, the number on benefits still rose in June and unemployment is a whopping 13.4%. To put that in perspective the UK unemployment is currently 7.9%. To have more than 10% of your workforce unemployed is dire.
The UK economy now faces a similar situation to Ireland. With the revelations today that so many jobs are expected to be lost, how can the Government argue that this budget is good for the economy? Shoring up the deficit may be a priority but ensuring millions of people do not face more economic hardship in the process should take precedence. While there are valid arguments for some reduction of public spending – losing a few unnecessary ‘consultants’ springs to mind – making vast cuts across the board when the economy is just starting to recover is not the answer.
The Government said the Budget was going to be ‘painful’ but that everyone would suffer. Well, clearly this is the case since it would appear as many as 1.3million people will soon be unemployed.
Sources:
New York Times: