Fiscal Policy Effectiveness in the Banking Crisis - Essay Example

of Learning: While addressing the House of Commons on Wednesday June during his annual autumn statement George Osborne, the Chancellor of the Exchequer had no option but to admit the fact that the government has failed to reach the set goals and is now experiencing setbacks. This resulted from the government move to greatly reduce the budgets of various government departments to as less as thirty percent. Osborne had earlier noted that austerity policies will greatly reduce the government’s budget deficit to as low as zero percent in the following four years. He also felt that it was a wise move to boost the economic status of Britain and enable it to pay off its public debt. However, neither of the above was achieved. It is evident how Britain’s budget deficit is at an alarming rate and the citizens are suffering with the increased recessions (Barrell and Liadze, 2009, p. 207) But the observers are calling upon the government to create solutions to these problems and reduce the credit ratings. The main demerit of this austerity approach is that it has failed to carry out scientific experiments to certify things beyond reasonable doubt and this has been a huge setback. In the recent years, Britain has been simply trying to experiment the efficiency of the austerity economy (Barrell, Holland, and Hurst, 2012, p. 933). For a long period of time, the Britain citizens have been living a life of depression notably no university institutional-review board would have allowed this kind of brutal human experimentation. But from a historical and scientific thought, it is rather a less important case to keep crying foul about. Observers have expressed their fears that Osborne austerity policies will not be easily implemented. Any quality economic textbook will assure you that things like the reducing of government expenditure will reduce the economic output largely, tax revenues to decrease, and spending on benefits to increase. This is to take place in the long run and may lead to an increase in the budget deficit. Osborne main idea was to win back the favor of investors and businessmen in the UK. To restore the situation that has resulted from the implementation of austerity policies in Britain with the main one being recession, there has been a big battle in terms of the efforts by the Bank of England to slash investment spending. This measure has remained decimal and depressed. Osborne switches his blame to the Europe Continent for being the biggest business partners with Britain but it is also a lame excuse because it was perfectly clear back in 2010 that Europe was headed for trouble in terms of recession. The best way to solve this matter is to loosen the fiscal policy and not tighten it or do it violently. However Osborne is greatly determined to propagate his pre-Keynesian economics. His tireless efforts have brought some change in the country’s fiscal policy but most people have not yet felt the fruits of his efforts and opt for better contribution. Back in 2009, the O.B.R. predicted that by the end of 2013-2014, the deficit would have fallen to 3.5 per cent of G.D.P. Now, the O.B.R. says that the actual figure will be 6.1 percent. Over the times there forecast has proven so optimistic but this has been viewed as an underestimation (Delong and Summers, 2012, p. 78). Despite the fact that Osborne has put up measures that reduce economic budget deficit and government spending the government has not yet implemented these measures and has pushed them forward until 2016 to 2017. The debt-to-G.D.P. ratio, which Osborne had earlier noted would peak at about seventy per cent, has surprisingly hit seventy-five per cent, and it is targeted to come close to eighty per cent in 2015-2016 because it was expected to start falling next year. Now, it is set to rise until at least 2017-2018 (Fatas, 2012, p. 78). The British government is trying to switch blame to the Eurozone crisis that has immensely reduced the amount of Britain exports goods. If the government realized that the external environment was unreliable it could have adapted to boosting the domestic market and solve this issue. The latest data shows that private domestic spending remains very weak in the face of increasing fiscal austerity which has only just begun. Private domestic spending has been projecting for some time now and pre-dates the latest Eurozone developments. This has mainly been caused by the reduced employment opportunities mainly contributed by a massive private sector indebts left over as the economy faced a major boost. Such an environment discouraged the investors from trading in the country because they were pushed away by the fear of meeting all existing demand with the capacity already in place. It is rather impossible for an economy to grow when private spending so minimal, the external sector is in decline, and the government is pursuing a deliberate policy of fiscal austerity (Giles, 2012, p. 82).This may be true because the UK economy is greatly exposed to the Eurozone crisis as compared to the US economy .This provides a clue about the difference in fiscal position currently being adopted by the respective national governments in each country. The difference between the governments economy can be viewed as to be caused by the way each respective nation handles their economic cases. The UK government has been announcing its will to put up harsh fiscal austerity on the national economy from the time it assumed office. The government wished to reduce its spending but the Olympics games in 2012 made this rather hard. However the public announcement to harshly cut down the spending was met with mild reaction from the households and business firms many viewing this efforts as to have diverse effects in future like causing a huge cut of employment opportunities. In contrast to the increased austerity witnessed in the US which has been greatly curtailed by the expansion of the private sector, the budget cut is mostly contributed by the many unsolved political matters in the country. It is strange that the US government is still handling the issues of job creation and economy growth which are not a topic in the British government. This can be viewed in comparison of the two governments suggesting that that the US government is demonstrating sound macroeconomic policy management because it does not undermine the impact of the private sector and promotes economic growth (Holland and Portes, 2012, p. 123) The US regime can adapt back towards recession just like other Eurozone nations and Britain if the political environment changes in future. Copying ideal from the current neo-liberal mantra that governments can successfully engage in a “fiscal contraction expansion” remains in my view an ideological assertion without empirical foundation. Countries can only grow from economic recession if the private sector is inactive and the government fiscal state is low when the external conditions are suitable and the countrys export rate and it compensates the lower domestic demand due to the government deficit budget. Small capitalist economies that basically depend on minimal labor costs and exports such as Ireland and larger capitalists economies like UK .US and JAPAN where profits still depend mostly on domestic markets and the unemployed labor force cannot be transported to the rest of the world to relieve the burden on the state both find it hard to solve this problem (Lein, N., 2007, p. 78). The UK as well as other governments in the Eurozone experienced tough times in 2008 and they had to make delicate choices as they faced a period of financial crisis. UK could have learned from the United States which responded to this crisis by coming up with a fiscal stimulus through making the most of the funds from the European Bank in an effort to boost its economic growth and consequently move away from recession. Instead Britain fully engaged in the austerity policies that ended up severely afflicting the initial crisis and choked any hopes of financial growth. The economic rational of austerity looks flimsy as there is no clear and workable theory on growth that underpins it and the tabled figures reflecting the situation in the private sector level of growth still needs a lot to be done for it to work. In addition, past economic crisis show that in no situation have austerity policies worked efficiently in the case that the total economic output is so much bellow the potential level (Stiglitz J., 2010, p.82). This implies that the current Britain government policy stands out as a giant economic experiment that is unprecedented. The claims of no scrutiny that the government of Britain has come up with are considered as not to stand up to any scrutiny. As the government keeps on insisting that it was painted to the corner, it becomes more likely if its plans fail to cut down on the deficit. The existing strategy by the government is looked at as being a golden shot, one that is nothing or all affairs. If this approach fails to work, then the government won’t have any alternative now that the bond market rates will result in a necessity to cut down on more spending. Bibliography Barrell, R and Liadze, I., 2009. “Fiscal Policy Effectiveness in the Banking Crisis”, National Institute Economic Review, 207 Barrell, R, Holland, D. and Hurst, I., 2012. “Fiscal Consolidation Part 2: fiscal multipliers and fiscal consolidations”, OECD Economic Department Working Paper No. 933 Delong, J and Summers, H, 2012. “Fiscal Policy in a Depressed Economy”, Brookings Papers on economic Activity 2012 Fatas, A., 2012. “Underestimating Fiscal Policy Multiplier”, blogpost, October Giles, C., 2012. Financial Times Holland, D and Portes, J., 2012. “Self-defeating austerity?” National Institute Economic Review 222 Lein, N., 2007. The Shock Doctrine: The Rise of Disaster Capitalism, Allen Lane: London Stiglitz J. , 2010. Freefall: Free Market and the Sinking of the Global Economy, Penguin: London Read More