UK’s economic growth spurt looks good, but austerity will hurt future

Written by Carma Hassan, CNN

LONDON — Since it was formed in December 2016, Britain’s Prime Minister Theresa May’s government has overseen a return to economic growth for the first time since 2014. The announcement of the UK’s best August performance in a decade, however, coincided with Finance Minister Philip Hammond’s announcement of new austerity measures.

These measures include easing in the political climate on austerity, with all departments expected to save around £6.5 billion in the 2018/19 financial year, and public sector workers set to receive a pay rise of three percent in the coming years. The 2.3 percent rise in the existing public sector pay cap is something that working families in the UK will be grateful for.

But as the announcement from the government was made, the Institute for Fiscal Studies (IFS) released a report warning that May’s approach to the deficit will not have the desired effect. The IFS says that the overall £10 billion of fiscal surplus achieved by the government this year — some £4 billion more than the government had hoped — will be turned into a £12 billion deficit by 2022. This will put the UK’s debt to GDP ratio, and any economy growing above 2% (the target is 3%) at risk of problems.

This will put the most vulnerable, particularly low income households, at a huge disadvantage. Historically, in England, there has been little incentive for the public sector to increase its spending if it is expecting to save money in the medium term. Likewise, if there is a recession and spending increases, as is likely to be the case if interest rates continue to remain low, the extra demand will have to be made up for somewhere else. The IFS estimated this to cost public sector jobs and public sector wages.

As the UK faces the risk of rising social unrest, Brexit negotiations and an uncertain future, people should be able to look to the state for some signs of stability. The decision to raise the wage cap was welcome — in the short term, it may help to increase the incomes of low income families, but if this increase was for one year only, it would not ease the financial burden placed on taxpayers.

Long term, this decision is likely to only worsen the public sector’s finances and discourage investment. The government cannot keep handing out lavish pay increases. A record public sector deficit will only increase by that amount more if they continue to maintain the same level of borrowing. The UK cannot do without a healthy public sector in the long term. It is politically inconvenient to go on allocating funds for deficit reduction, but a prosperous future for the UK is dependent on a sustainable public sector.

IFS deputy director Fraser Nelson calls this move “at best ineffective, and at worst catastrophic,” which is a bold statement, but one that is not far off the mark. The public sector already contributes around 25% of government spending, compared to only 20% in 2013. The financial burden on taxpayers is now starting to truly expand, even without the cost of Brexit. Public sector pay must be set within a range that is sustainable, and can be absorbed in the long term. This can only happen by guaranteeing stability for the public sector workforce.

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