Tag Archives: structural deficits

A trip to the UK and ‘austerity’

5 Apr

The word ‘austerity’ has it’s origin dating back to 1300–50 and has Anglo-French roots. Sternness, harshness are typically qualities of being austere and one dictionary suggests that austerity was applied during WWII to national policies limiting non essentials as a wartime economy.  Rationing for example is a form of austerity.

Currently David Cameron’s Conservative government are attempting to persuade the populous that the UK needs to cut the fiscal and structural deficit. My concern here is that opposing parties and the public don’t understand economics and basic financial fundamentals; one should not spend more than they can afford. Like our friends in Ireland, the former PM’s one statement summed it all up. Brian Cowen tried to calm the media and the public by saying that Ireland is well funded until mid-2011 so the country faces no liquidity problems.

Clearly this showed that he did not have a clue and that the market were not concerned so much about Ireland’s liquidity (since borrowing would be available but just at higher interest rates), but its solvency.  And to say Ireland was well funded until 2011 showed how recklessly their finances were managed that they would allow an entire nation’s people to be reliant solely on the spirit and sentiment of the market.

In the UK I don’t believe the deficits are been cut enough. In the US currently Congress are locked in debate as to whether fiscal deficit year-end 2011 should be $1.6 trillion or $1.54 trillion. Rep. Frank believes large banks are currently well capitalised. I would prefer to take the opposite side. It seems that the only argument against deficit cutting is that we need to grow the economy by spending borrowed money which will create a multiplier effect throughout the economy. I question that premise of growth. Growth is through investing capital that has been saved and invested, that has been generated via an opportunity cost like forgoing current consumption.

Growth is achieved by investing in capital infrastructure, our export markets and developing our knowledge base. Like in the UK, across Europe and in the US the blame culture rampant among politicians, citizens and business leaders continues indefinitely while the Chinese, Indians, Russians and Brazilians are not only eating our lunch, but our breakfast, tea and dinner.

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