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The UK experiment off to a rocky start

October 21st, 2010 · No Comments

While the French are going beserk over a rather modest pension reform, the British keep a stiff upper lip, uuh, purse in the face of unprecedented public sector cuts…
Retail sales down for the second month running in anticipation of these cuts..

That doesn’t bode well, frankly. Up to half a million public sector workers are going to be fired, taxes are going up, spending will be slashed up to 25%. It’s nothing but bold, and the UK has one advantage over Greece and Ireland (and Spain, Portugal, Belgium, Italy, etc.), it has its own currency still.

The Bank of England is ready to increase bond buying, and debasing the currency. We know from the experiences of Greece and Ireland that austerity isn’t the instant cure some argue. Typically, the economy gets even more depressed initially (and therefore the budget deficit will not decline all that much), but these countries could not debase their currency, so the UK might be in a better position here, it remains to be seen.

The chancellor of the Exchequer burns his boats by arguing there is no plan B. That remains to be seen. If the economy derails badly, we expect the coalition to derail as well as the Liberals (the junior coalition partner) didn’t sign up to this before the elections (quite the contrary, as it happens).

For one reason it’s good that it’s tried though, it’s an interesting economic experiment, although those soon to be laid-off public sector workers will not agree with that..

Tags: Credit Crisis · Public Policy