UK’s Finance Minister Vows to Stay Course on Austerity Plan
Associate Editor, CNBC
The UK’s finance minister, Chancellor of the Exchequer George Osborne vowed to continue the coalition government’s austerity program on Monday telling delegates at his Conservative party’s annual conference in Manchester, UK, that Britain would “ride out the storm.”
The chancellor argued that to change course now would undermine Britain’s position in the world as a financial center, arguing to do so would be to abandon “ the deficit plan that has brought us the stability other nations today crave.”
He said that to borrow more to increase government spending would be the cause of Britain’s problems, rather than the solution to them and would risk the country’s credit rating for the sake of “five, ten or 20 billion pounds”.
“That the world is in the grip of a debt crisis has not undermined that argument—it has made it stronger,” he added.
“Fiscal credibility is not some abstract concept—it keeps families in their homes, firms in business, people in their jobs.”
Telling conference delegates that the problems facing the British economy were “not visited on this country by some cruel act of god or blind force of nature” but rather “created by the mistakes of human beings”, the chancellor unveiled a series of proposals which he argued would restore economic growth.
They included proposals to freeze Council Tax—a local government tax in the UK - for the second year in a row, a proposal which had been much trailed in the British press over the weekend and which the chancellor said would save the average UK family £72 ($111.6) a year.
Osborne also announced plans which he argued would support business by introducing fees for applications to employment tribunals for the first time from 2013, and by extending the qualification period for employees that wish to take their employers to a tribunal for unfair dismissal from one to two years.
But the chancellor, in a tacit admission that Project Merlin—the scheme designed to get the UK banking sector lending to small businesses—was not working, also announced he would be looking at the options to increase lending to small businesses through ‘credit easing’.
The scheme was necessary admitted the chancellor because "the banks are damaged, they won't lend at the current low rates. It's like putting your foot on the accelerator but, because the transmission mechanism is not working properly, the car wheels won't respond."
Treasury officials later explained 'credit easing' would see the government buying corporate bonds from small businesses through an arms length operation, with the Bank of England acting as the Treasury's agent. This would effectively mean the government would be the lender of last resort to the small business community, which has been struggling to obtain loans from the banking sector for over three years.
Treasury officials also said the scheme was separate from quantitative easing by the Bank of England and likened it more to the credit market for small and medium sized businesses in the US, that did not depend on the banks.
The chancellor’s speech came as ratings agency Standard & Poor’s (S&P) reaffirmed the UK’s AAA rating.
S&P said: ”The ratings could come under downward pressure if, against our expectations... the coalition government's commitment to fiscal consolidation falters.
The chancellor laid out plans to invest £150 million in improving cell phone coverage across the UK. He also resurrected an old conservative party policy from the 1980s by announcing plans to make it easier for those living in council housing—housing provided by local government and rented to those on lower incomes—to buy the property they lived in. The money would be used, he said, to build as many as 200,000 new homes for those on lower incomes and create as many as 400,000 new jobs.
The government would also invest £50 million in a Graphene Global Research and Technology Hub to commercialize Graphene which would capitalize on the UK’s international leadership in the field, Osborne said.
The chancellor’s speech was attacked by the opposition Labour party for rehashing old policies and doing little to help stimulate economic growth.
"George Osborne is simply re-announcing a pledge first made in his conference speech three years ago and repeated in the Conservative manifesto and coalition agreement,” Chris Leslie, Labour’s shadow treasury minister said of the Council Tax proposal,.
"If the Chancellor is serious about getting the stalled economy moving again he'll need to do much better than this…When even Conservative backbenchers are now openly saying the government has no credible plan for growth, it's time for ministers to start listening," he added.
But Simon Walker, the new director general of the UK’s Institute of Director’s gave a cautious welcome to the speech saying: “George Osborne is 100 per cent right to stick to the deficit reduction plan, but there needs to be a fresh effort to increase growth and burdens on business must come down.”
"The IoD has long called for a modest charge for bringing a case to an employment tribunal, and today’s announcement is a vital step to ending the ‘no win, no fee’ employment law culture that has frightened so many businesses into recruitment inertia.,“ Walker added.