Bank acts while Osborne idles

Group Business Editor

Thursday 12 July 2012

THE independent Fraser of Allander Institute, the highly regarded Scottish economic think-tank, highlights in its latest commentary its strong belief that the UK's recovery from the deep 2008/09 recession was extinguished by the Conservative-Liberal Democrat's fiscal austerity programme.

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Ian McConnell

One wonders whether, deep down, Chancellor George Osborne might harbour some concern that the UK's renewed recession might have been caused in large part by his hellfire-and-brimstone rhetoric about the country being close to bankruptcy and, in his first Budget in 2010, his £40 billion hike in annual public spending cuts and tax hikes to £113bn due by 2014/15.

However, when it comes to his damaging fiscal austerity programme, it seems it is very much a case of "keep calm and carry on" for Mr Osborne. Those suffering the misery of unemployment caused by poor economic decision-making do not have the luxury of such an approach.While Mr Osborne refuses to adapt fiscal policy to the UK conditions which have come to pass and which he should have foreseen, the Bank of England is once again pulling out the big guns to try to deal with the renewed crisis.In a scheme backed by the UK Government, it is poised to make many tens of billions of pounds available to banks at interest rates below those which they can obtain in wholesale money markets on the condition that these funds are then lent on to households and businesses. Meanwhile, a further £50 billion increase to the quantitative easing programme, which now stands at £375bn and is aimed at stimulating activity by boosting money supply through the purchase of Government and corporate bonds, was approved last week. Thank goodness the bank is doing something.In contrast, while involved in the plan to stimulate lending, what has Mr Osborne done with his fiscal levers to try to haul the UK out of recession? Not much, if anything at all. In his March Budget, he cut the top income tax rate from 50p. This is hardly likely to stimulate consumer spending.At the other end of the income spectrum, those consumers who have to spend all of their money and do not have the luxury of saving were hammered by Mr Osborne's hike in value-added tax to 20%.Meanwhile, Mr Osborne's corporation tax cuts appear to have done little, if anything, to stimulate investment from the business sector. Then again, companies are hardly likely to invest heavily if the consumers who buy their goods and services have little or no money to spend on them.The escalation of the eurozone crisis since last summer is a convenient excuse for Mr Osborne. However, it is worth noting that the 17-nation eurozone as a whole, unlike the UK, avoided renewed recession in the second quarter. And, as Fraser of Allander points out, "it is now clear that the recovery in output stalled after mid-2010". This was pretty much immediately after Mr Osborne's debut Budget.The Bank of England's huge move to try to boost lending, its separate decision to make further liquidity available to banks, and its move towards boosting the QE programme highlight the urgent need for drastic measures to try to haul the UK economy out of its renewed recession. It even re-considered in June whether there were any merits in cutting UK base rates further from their record low of 0.5%, a level at which they have stood since March 2009, but decided against such a move for now.Mr Osborne, however, looks in no mood for the drastic fiscal action required to help him correct the mistakes of his own making. Like Margaret Thatcher, he is not for turning, even though his plan for Britain isn't working.The Scottish Government's common-sense calls for "shovel-ready projects" to boost economic activity and employment continue to be ignored.With Mr Osborne refusing to budge, there is nothing else for it, for Scotland and its business community and the rest of the UK, but to get on with the challenge of making the most of the grim economic environment, which looks unlikely to get much better any time soon even though output remains way below its pre-2008/09-recession peak.The international dimension remains crucial at a time when the UK is back in recession. Companies which are focused in terms of their exports on the eurozone need to continue to adapt by also targeting economies which are showing greater growth, such as those in Asia.China is not the easiest market to crack but there have been plenty of success stories for Scottish entrepreneurs, such as engineer Jim McColl, who have targeted the opportunities there.There has not been much good news on the economic front in recent weeks, to put it mildly.However, some cheer was provided by a survey in the last month from accountancy firm Ernst & Young, which showed Scotland had generated more jobs from foreign direct investment than other parts of the UK. E&Y acknowledges the role of the taxpayer-funded Scottish Development International in this regard. In 2011, 5926 jobs were created in Scotland through foreign direct investment, the highest figure since 2000.It is vital not to lose sight of such bright spots amid the gloom.

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Bank acts while Osborne idles

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