29th March 2012
Our fate now awaits us!
I have now passed the angry stage and have become reconciled that our fate awaits us and we will have to see the fall in Europe and the USA before there is any hope of halting the rampant destructive march of the free market and globalisation which is only making us poorer and poorer. News coming out of parts of Europe would suggest that this fall has already begun.
At the moment, though, whilst there are some murmurings it does seem like business as usual.
President Obama in an act of self delusion and trumpeting a false proclamation about “a special relationship” seemed to wish to upstage the UK with pomp and ceremony during Cameron’s recent visit. Apart from the unnecessary expense in these times of austerity when people are starving the pomp and ceremony has served to heighten Cameron’s growing megalomaniac tendencies. Bernard Shaw said “The megalomaniac differs from the narcissist by the fact that he wishes to be powerful rather than charming, and seeks to be feared rather than loved. To this type belong many lunatics and most of the great men of history”. I think the two leaders display both these tendencies. They both seemed to be oblivious to what is going on around them. History should remind them of Nero fiddling whilst Rome burned.
In the UK the focus seems to be on the Olympics. We have to wait until then for the economy to grow. Sunday shopping restrictions are to be lifted during the Olympics in a desperate move to kick start the economy!
We are three years into the crisis. At the start some described it as a recession, some a depression. Now the politicians refer to the economy as flat lining, whilst the Bank of England has introduced the word “zigzagging”. These descriptions allow claims to be made that a double- dip recession has been avoided. The reality is that there is no growth. The fact that we are witnessing a profound change in our fortunes has still to be fully understood and accepted.
Following on from Osborn presenting his budget he was questioned by a parliamentary committee. He stated that the main thrust of his programme for growth was a tax regime friendly to business, the relaxation of planning laws and the reduction of regulations!! Where did he study economics?
How will these measures stimulate consumer demand?
Consumer demand has been and will continue to fall because of the austerity cuts and inflation. Inflation seems certain to rise again. Inflation fell because the VAT increases at the end of 2010 have fallen out of the calculations. It is certain to rise again. I can see the headlines in a month or two –“Surprise rise in UK inflation”. Fuel prices have risen markedly because of the spiralling price of oil and will rise further next month when proposed duty increases kick in. The drought in much of the food producing areas of England is beginning to affect fruit and vegetable prices. Eggs have increased by 30% following the introduction of new EU rules governing the husbandry of chickens. Demand for chicken meat had been increasing as it was cheaper than other meats. The cost of this will also rise. Small print in the budget has removed the zero rating of many VAT supplies. Some of these VAT changes will not just affect inflation but also growth. Churches and buildings of historical interest will no longer be exempt from VAT on repairs. This will reduce the amount of repairs carried out.
The ONS has just revised the UK’S economic growth for the last three months of 2011 to a contraction of 0.3%. The European Commission has predicted that the euro zone economy will contract by 0.3% in 2012 – while the OECD is predicting 0.2% growth for the bloc. It predicts that Spain and Italy – as well as Greece, Portugal, Belgium, Cyprus, the Netherlands and Slovenia – will all shrink in 2012. Growth in China and India has slowed.
The full impact of tax increases and the withdrawal or reduction of many benefits together with the implementation of further austerity cuts have still to be felt. Demand has to be weak if disposable incomes are falling. The ONS reported recently that real household disposable income had fallen by 1.2% in 2011, the biggest decline since 1977. Real disposable incomes will continue to fall. Another small print in the budget, which I thought would have rung alarm bells, is an admission that over the lifetime of the present parliament the UK is now set to borrow£150bn more. This is after the tax hikes and austerity cuts. Borrowing both in value terms and as a percentage of GDP has increased each year since 2010 and the forecast is for this trend to continue to at least 2014.
I cannot comprehend Osborn’s logic that less taxation on the rich and business will encourage investment and boost growth. If it were true then other countries would follow and very soon there would be no benefit, only less revenue. In times of rising growth in the World economies there could be an argument to reduce taxation in order to attract investment. There is no growth. There is no demand to justify investment.
Once the credit rating of the UK is downgraded and our interest costs spiral then the main plank of Osborn’s strategy, with his austerity measures, to hold down interest costs would have disappeared. What then? We would have had 3 lost years and the hardships would count for nothing. I fear this will happen as I just cannot believe that our economy will grow.
Following the bailout for Greece the Euro Crisis has not featured prominently in the news. Recent reports suggest this is likely to change. The head of the Organization for Economic Cooperation and Development (OECD) has said in the last few days that the Euro zone needs to double its bailout fund to 1tn Euros ($1.3tn, £836m). Angelo Gurria said the Euro Zone countries should boost their funds from the current limit of 500bn Euros. He said “The mother of all firewalls should be in place, strong enough, broad enough, deep enough, tall enough,”.
Last weekend, the EU’s Economics Commissioner Olli Rehn conceded that the situation in Spain was “fragile”. He said “that further austerity is coming at a time when unemployment is at almost 23% and rising. The economy will contract by at least 1.7% this year, perhaps more. House prices are still falling and the debt carried by Spain’s banks is still causing concern. The central question for Spain is this: has it reached the limits to what austerity can achieve? The fear in government circles are that to push further with spending cuts will tip the country into a cycle of decline”.
The Bank of Spain on Tuesday confirmed that the Spanish economy had fallen back into recession. It contracted again in the first quarter of 2012, after shrinking 0.3% in the last 3 months of 2011. The recession was blamed on a decline in private spending in January and February – down to levels not seen since 2010. The Bank of Spain added that it expects the economy to shrink 1.5% in 2012 as the government faces a 22% unemployment rate, low tax revenues and higher demand for benefit payments.
Spain on Tuesday paid a higher borrowing rate on 2.6bn Euros for a six-month debt and the fact that yields on its outstanding debt have trickled higher has worried European officials. Some municipalities throughout Spain have run out of money and we now have the unthought-of spectacle of an advanced civilised society not paying thousands of its workers. Some have not been paid for three months.
Olli Rehn spoke further about Italy “All the indications are that Italy too will remain in recession this year. Its unemployment rate is rising and its debt to GDP ratio remains around 120%. The main union is implacably opposed to the reforms. Mario Monti’s biggest challenge is at home. He added that the economies of Spain and Italy are the key to the euro zone crisis”.
A report in the Irish Times says it all:-Despite the cutbacks, minister for social protection Joan Burton said Ireland remains strong on social welfare cuts. “Even after the loss of our economic sovereignty, our core welfare rates remain generous by comparison with our nearest neighbours,” she said.
Also the Minister of Finance Michael Noonan made a recent statement that emigration is a lifestyle choice for many. The Irish Times commented: – “Of course it is but for many more, such as the four in ten who are forced to leave, it is decidedly not. The blunt fact is that any country where four in ten of its emigrants say they have been forced to leave because of economic hardship is in a complete mess. With massive unemployment, huge government debt and ceding sovereignty to European overlords, Ireland fits the bill. The recent image of thousands lining up for job fairs for Australia and New Zealand increased the sense of a sadly hollowed-out country.”
The fate of Greece was yesterday’s news. The fate of Spain and Italy is today’s news. Tomorrow will be our news. We can but sit and await our fate!