Cameron’s “failed experiment” leads to yet another economic downgrade

There was more grim news on the state of the British economy today, with Ernst & Young’s ITEM club slashing its prediction for growth by 50 per cent today, meaning its current forecast stands at a mere 0.9 per cent for the whole year.

It further recommends the Bank of England cut interest rates in half, from 0.5 to 0.25 per cent.

Peter Spencer, the chief economic advisor to the Ernst & Young ITEM Club, said:

“It’s worse than we thought. The bright spots in our forecast three months ago – business investment and exports – have dimmed to a flicker as uncertainty around Greece and the stability of the Eurozone increases.

“With the UK recovery grinding to a halt, new measures are now needed to help stimulate growth. We think there is scope for targeted tax relief and spending measures to help put us back on track.”

When asked on BBC News what happened to cause this downgrade, Spencer replied:

“Quite simply, our worst nightmare in terms of the Euro area and world economy…”

Although they avoid politicised language, Ernst & Young have joined a growing body of organisations speaking out against the well-worn “maxed out credit card” myth.

No longer are these calls limited to a mere half-million students, trade unionists and activists marching for an alternative; now pinnacles of the small-c conservative establishment such as the IMF and the EU are joining in that call, as is the New York Times, which printed a damning editorial on Saturday:

For a year now, Britain’s economy has been stuck in a vicious cycle of low growth, high unemployment and fiscal austerity. But unlike Greece, which has been forced into induced recession by misguided European Union creditors, Britain has inflicted this harmful quack cure on itself.

Austerity was a deliberate ideological choice by Prime Minister David Cameron’s ruling coalition of Conservatives and Liberal Democrats, elected 17 months ago. It has failed and can be expected to keep failing. But neither party is yet prepared to acknowledge that reality and change course…

Drastic public spending cuts were the wrong deficit-reduction strategy for the weakened British economy a year ago. And they are the wrong strategy for the faltering American economy today. Britain’s unhappy experience is further evidence that radical reductions in federal spending will do little but stifle economic recovery.

A few years of robust growth would go far toward making swollen federal deficits more manageable. But slashing government spending in an already stalled economy weakens anemic demand, leading to lost output and lost tax revenues. As revenues fall, deficit reduction requires longer, deeper spending cuts. Cut too far, too fast, and the result is not a balanced budget but a lost decade of no growth.

That could now happen in Britain. And if the Republicans have their way, it could also happen here.

Austerity is a political ideology masquerading as an economic policy. It rests on a myth, impervious to facts, that portrays all government spending as wasteful and harmful, and unnecessary to the recovery. The real world is a lot more complicated. America has no need to repeat Mr Cameron’s failed experiment.

See also:

• Barroso joins the international push for Plan B - Alex Hern, September 28th 2011

• Osborne set to U-turn on QE – so why not on Plan B? – Shamik Das, September 12th 2011

• Obama mocks the mad Right and makes the case for the State - Shamik Das, September 9th 2011

• New IMF boss joins calls for Plan B - Will Straw, August 16th 2011

• Coalition’s flagship growth policy is “total flop” – Will Straw, July 31st 2010