Back to Britain

by Benjamin Studebaker

Today I find myself preparing to board plane to resume my final undergraduate year at the University of Warwick in Britain. But what sort of country am I coming back to? Has Britain’s government managed to turn around the country’s economic situation, buoyed by the Olympics, or does Britain remain stuck in the doldrums? That is today’s topic.

When I left Britain, it was in the midst of an austerity drive to cut spending to lower government borrowing costs and increase confidence. The first question, I suppose, is in what sort of shape those government borrowing costs are in. Let’s have a look:


Since I was last in the UK, British borrowing costs have gone up slightly, but negligibly–as we can see, they remain under 2%. The traditional danger zone for 10 year bonds is around 7%, so this seems to be quite acceptable. Interestingly, when the government came into power rates, were still under 4%–there was never any serious risk of a British debt crisis, despite what everyone seemed to be saying at the time. But hey, perhaps these rates are so low now that we might expect to see that confidence boost the prime minister has been going on about. So what have the growth figures been up to?

Oh my, this won’t do at all. That’s three quarters in a row of economic contraction for Britain. There does not seem to have been any confidence boost resulting from those low government interest rates. Has it translated into more jobs for British workers? Sadly not:

The unemployment rate in Britain remains no lower than it was when Cameron and company took office, continuing to hover around 8%. However, there appears some hope in all of this–with low interest rates on government debt, it would seem that the British government could easily use fiscal stimulus to boost growth and lower unemployment. The only reason not to do so left on the table would be high rates of inflation, and indeed many people are worried about inflation resulting from fiscal and monetary stimulus.  What has the inflation rate been doing in Britain?

With an inflation rate hovering down at 2.5%, inflation is minor, but still higher than the interest rate on 10 year bonds in Britain, which means that money that the British government borrows to invest in increasing economic growth depreciates in value under inflation faster than it has to be paid back. The British government is still being paid to borrow money.

So, to summarise, the British government thought that spending cuts would:

  • Lower government debt, inflation, and government spending costs, leading to a gain in confidence
  • Gain in confidence leads to higher growth, lower unemployment, mass praise for the coalition

In reality, Britain has seen via austerity:

  • Lower government debt, inflation, and government spending costs, leading to a net fall in demand that has stifled any recovery
  • Consistently poor growth rates and unemployment figures to verify that failure

In the United States, better growth figures (the US economy has not seen contraction since second quarter 2009) and roughly equivalent unemployment figures have consistently been used to attack the Obama administration and argue for policies more in line with his opponents. His opponents’ economic plans consist of the same austerity policies implemented by the British coalition government. If doing what Obama did yielded mediocre results, and doing what the coalition has been doing yields even worse results, it stands to reason that the appropriate course of action is to further accentuate the policies that have shown ability to get results in the past–fiscal and monetary stimulus.

Even if you won’t join me in calling for that, it at the very least shows that the coalition government should be receiving at least as much flak as the Obama administration has been getting on the economics angle. To the British public’s credit, there has been a swing away from the parties currently in the government, but the two governing parties combined still have more public support than their opposition, ideally because of the opposition party’s central role in spending during the pre-recession boom, deregulating finance, and consequently contributing to the severity of the British recession in the first place, but more likely because the popular political narrative in Britain is that the opposition party put Britain into debt, necessitating austerity. It is such a shame that this austerity was never really needed, and that the last few years of pain and misery in Britain have been essentially for nothing, and that the British public has been more or less complicit in the self-laceration. How much longer before the lesson is learnt? We shall have to see…