Election economy Britain's Balancing Act

Britain's ruling Conservatives should make its continued financial recovery the centrepiece of upcoming elections rather than focus on divisive issues such as Europe.
CAMERON OSBOURNE distorted
CAMERON OSBOURNE distorted

The French bank Société Générale recently advised investors to liquidate their British assets because the country has yet to get its big budget deficits under control.

Like everyone else, the analysts expect it will only get worse after national elections in the country in 2015. They predict a new government with no clear majority – led either by a broken-down and indecisive Labour Party, or by the Conservative Party and their obsession with leaving the European Union.

On Wednesday, Britain’s finance minister tried to present a different picture, juggling fear and hope in the Conservative Party’s last economic policy statement before the spring elections.

George Osborne hoped to scare voters away from the Labour Party, which left the country with mountains of debt after its last term in office from 1997 to 2010. He also had to show enough hope in Britain’s fiscal future to convince voters that the worst was over – and that austerity measures, no wage increases and stagnating real income would soon pay off.

For a balanced budget, the fruits of growth might be too meager and tax revenues too weak.

Mr. Osborne believes the government has prevented Britain from falling into the abyss and is putting it on the right path to long-term prosperity. He pointed to rapidly falling unemployment, stable inflation and a rate of growth that outpaces most other European nations — even if it depends too much on consumer spending and a real-estate boom.

For 2014, Britain’s forecast growth was raised from 2.7 to 3.0 percent — and 2.4 percent for the coming year. That is “seven times more than in France,” Mr. Osborne said, in a deliberate dig at his neighbor across the English Channel.

The debit figures are less rosy. The deficit continues to be 5 percent higher than in France and Italy, a fact that Mr. Osborne trumpeted less loudly. At £91.3 billion ($143 billion), it will be £5 billion higher than planned for the fiscal year ending in March – and £12.5 billion higher over two years.

Mr. Osborne insisted, however, that the economy could get on track to reach his goal of a budget surplus by 2018.

But for that to happen, the fruits of growth might be too meager and tax revenues too weak. This is because the quality of new jobs is low, wages continue to stagnate and, after generous tax reductions for low-income workers, too little money is brought in by taxes.

Help is expected in the form of a new “Google tax,” which would impose a 25 percent tax on profits of companies that shift their earnings from Britain to foreign countries.

Even with elections pending, Mr. Osborne is demanding difficult austerity measures from the British.

Mr. Osborne’s planned rebalancing of the British economy – away from services and consumption and toward more export-oriented industrial production – is proceeding too slowly. He can blame the weak world economy and stagnating euro zone. He can point out that investments by British companies are rising and that the country is becoming better positioned for a global upturn.

And it is good that Mr. Osborne is discovering his previously denied belief in Keynesian economics by trying to buttress growth through public spending on infrastructure — from building roads to erecting new flood-control systems.

Mr. Osborne and the Conservative-led coalition are in fact less radical than they claim to be, but they continue to be the most radical savers and reformers in the country. Even with elections pending, Mr. Osborne is demanding difficult austerity measures from the British.

The deficit has been reduced by about a half; bringing it down the rest of the way will be tougher. No one in Great Britain has a better plan, because no one is telling the British more clearly that their economy is far from being out of danger.

Mr. Osborne can do his country no better service than to make sure that the electoral campaign is fought around fiscal policy – and not on sideline issues such as immigration or distant and uncertain negotiations concerning the European Union.

 

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