HM Treasury’s website notes that “The Budget is the single most important economic and financial statement made each year by the Chancellor of the Exchequer to Parliament and the nation.“ The Chancellor of the Exchequer, George Osborne, presents the next Budget on Wednesday, 20th March. As the dominant party in the coalition government focuses on its preparation for the next general election, I do not expect any real surprises as the game’s name remains the continued expansion of the money supply to keep us voters happy.
I have little time for academic economists, especially as so few of them anticipated the 2008 crisis. On one hand, there are those who support Eurozone-type austerity to control the ballooning deficit and prevent continued currency depreciation. On the other hand, the Keynesians call for continued deficit spending. Amidst this pulling and tugging, the coalition government continues to use the term ‘austerity’ liberally but that does not seem to correspond with what is really happening. While the Eurozone faces serious austerity, here in the UK government debt continues to accumulate at roughly the same rate as it would have done under a Labour government. The criticisms have been relentless. Financial writer Matthew Lynn last month said –
“Deathbed of Keynesian Economics Will Be in the U.K … The U.K. has produced notable economists over the years, but John Maynard Keynes, the guru of government intervention, was one of truly global significance. So it may be fitting that the U.K. will also become the deathbed of Keynesian economics. Britain has been following the mainstream prescriptions of his followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalized almost half the banking industry … At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed”
Why is Lynn being so harsh? From July 2008 to date, the pound sterling is down around 25% against the US dollar and the recent credit rating downgrade suggests that the pessimistic outlook remains. For regular consumers like me, inflation remains a problem here in the UK. It’s running at around 3%, which is slightly more palatable than 2010/2011’s 5%. Still, for those coping with escalating train fares and out-of-control gas / electric billing, the burden of inflation feels much heavier than the numbers suggested by the government’s press releases. But even these official inflation numbers argue that the UK is the most inflation prone economy among the major Western nations. In the US, the Federal Reserve is supposed to combat both inflation and unemployment, while the Bank of England has only a single mandate: to keep inflation contained. Obviously, it’s not doing such a great job, given that it has a 2% inflation target.
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Would superstar Mark Carney make a difference? The Canadian who will become governor of the Bank of England in July, at a parliamentary committee on February 7th, indicated support for simply allowing inflation to stay above target for an extended period. Sounds like business as usual to me.
Some argue that beyond weak economic indicators, we need to remember that the pound sterling’s status as a world reserve currency continues to weaken. Despite the influence of the City of London and the role of certain British dependencies as offshore financial centers, the US dollar remains the world’s reserve currency, and as such benefits from a demand that is independent of its economic fundamentals, thanks especially to the oil/gas trade. The euro benefits from the size of the eurozone and the legacy of the German banking discipline.
So to me, the real question to be answered is not what is said in Wednesday’s budget. The real question is where does the UK see its future? Is it about closer European integration or going it alone seeking bilateral deals with key international players? In a world where economic and political power is in flux, it makes sense to stay in the EU while staying as close to the US as possible. But the UKIP movement here, which reminds me of the Tea Party movement in the US, is making this a difficult proposition if the Eastleigh by-election results are anything to go by. This movement has the potential to do much more harm than good. They could turn the UK into a basket case like Grillo’s Italy. If so, God helps us all…
Read more on derrenjoseph.blogspot.com.
Note: The blog that used to be here is now at https://www.mooresrowland.tax/.