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article imageOp-Ed: UK economy predicted to shrink in 2012 due to austerity measures

By Ken Hanly     Aug 5, 2012 in Business
London - According to the National Institute of Economic and Social Research the UK economy may actually shrink by half a percentage point in 2012 compared to an earlier estimate of zero growth. The think tank blames austerity measures for the decline.
The NIESR (National Institute for Economic and Social Research) predicts that no recovery of any significance will take place until 2014. Both cuts to government spending and economic prospects for Europe given the debt crisis will contribute to this very slow recovery. The think tank claims that output in the UK would have been considerably higher had deficit reduction been postponed for three years. The NIESR predicted only 1.3% growth in 2013.
The NIESR claims that output this year would have grown 1.2% if the measures had been postponed. Over a decade the austerity measures may have lowered UK growth by 16.5%
Output in the UK dropped by 7 tenths of a percent in the second quarter of this year. Some analysts are calling for an easing of spending cuts as well as tax hikes but so far the coalition government of Conservatives and Liberal Democrats has held firm to its deficit reduction plans.
The NIESR claims that unemployment in the UK will peak at 8.6% next year somewhat below their earlier forecast of almost 9%. This is still much better than many European countries. The government could also still erase the structural budget deficit by 2017 as it plans.
Nevertheless economists at the NIESR recommended spending and easing of austerity measures. "It remains the case that there is scope for a less aggressive path of fiscal tightening..The government should consider on-balance sheet funding of key projects, concurrent with a comprehensive restructuring of banks and key funding markets."
While the Labour opposition party has criticized the government austerity programs the government has the support of the OECD and the IMF. The IMF did caution however that if the economy continued to shrink that there should be some fiscal "loosening".
The Bank of England has engaged in some quantitative easing and plans to buy 50 billion pounds more in UK government bonds. The NIESR argues that this policy is now providing diminishing returns.
While many liberal economists such as Paul Krugman criticize austerity measures for lowering growth rates or even causing GDP to decline this ignores positive features of the policy from a capitalist perspective. Austerity measures lead to reduced expectations, and slash entitlement spending. They also weaken the power of labor. Increased unemployment reduces wage demands. All of these features in the longer term will improve profitability. As the positive spinners put it competitiveness is improved. The issue is also covered here.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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