Sunday, 27 January 2013

Where is the growth?

GDP figures came out recently showing -0.3% economic growth. Overall 2012 saw just 0.1% growth in the economy.  Why is this so considering the government says it is tackling the debt and deficit coupled with tax cuts? Obviously partially responsible is the amount of uncertainty in Europe at the moment. This is not just directly because of debt crises in Greece, Spain etc but because the exchange rates for the Euro are fluctuating, ironic for a currency that was specifically designed to be stable. But it’s no good just pointing over the Channel because other countries are growing.

So what’s up with the UK? Well Mr Osborne is bending the truth quite a bit when he says what I have laid out above. There are/will be some tax cuts, notably the decreasing amount for corporation tax, enterprise zones, dropping the 50p tax rate and the personal rate for income tax rising to £9,000. But where are the incentives for local government to decrease their business rates (particularly important due to the government wanting an emphasis on small business growth)? Why is VAT, capital gains tax and overall the tax level for the highest earners, who have the most capital to spend, up? The debt is going up, not down. The lack of cutting by the government means they are spending more on stimulus than Gordon Brown leading to the deficit falling slower than first predicted in 2010. No wonder there isn't any growth the Treasury hasn't got a clue what it is doing. Is it trying Keynesian stimulus methods that will in the short term create economic growth but accumulate more debt making the problem worse in the future or is the focus on market liberation by cutting spending and lowering tax?

There is also another element of a lack of capital in the UK with any left being spent on depreciation and not investment creating growth. The UK banks have to keep a high proportion of their capital stored in case of another crisis, helped out by quantitative easing. The low interest rate too means there is a lack of savings. Government stimulus as replacement for this capital shortfall is not appropriate, not only because it’s piling on the debt mountain, but because government is clueless to what is sound investment i.e. HS2 and wind turbines. We need to examine firstly lowering the amount of money the banks keep in case of a crisis and then, possibly sooner rather than later, raise interest rates so people can create capital through savings. It’s going to have to happen sometime.

So how can we get growth? Well firstly Government needs to decide to cut taxes and actually reduce government expenditure instead of trying half-heartedly to stimulate short term growth by Keynesian spending. After this is set in place we must then examine the lack of capital in the UK by reducing bank emergency funds and beginning to raise interest rates, because despite this making borrowing for investment less attractive there is little capital to borrow from anyway with fewer savings.

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