Delivering Austerity

30/07/2010 at 2:19 pm 2 comments

As we have already mentioned in passing, there seems to have been little debate as to the consequences of the possible failure of the austerity measures that several countries are now proposing or trying to adopt to deal with their budget deficits. The impact of budget cuts on growth has received a lot of attention; the importance of those cuts, not so much.

There are two items in the news this week that suggest it should.

First is the latest from Greece, where striking lorry drivers are defying the prime minister’s emergency order, signed yesterday, to return to work. This has led to fuel shortages in Athens, and together with other strikes and rioting, a fall in tourist numbers. (There are echoes here of Britain’s haulage strikes over the price of fuel ten years ago: for a few days they were an inconvenience – then high street chemists started to run out of insulin, among other serious problems.)

The second item concerns the funding of Trident. The chancellor is insisting that the cost of renewing Britain’s nuclear deterrent should be met out of the defence ministry’s budget (of which it would account for about half), rather than being provided for separately. The ministry is not best pleased. It looks as though the British cabinet is split – and not even along party lines at that, as the chancellor and defence minister are both Conservatives.

Britain’s coalition is holding up reasonably well for the moment. But over the next few months we will be enacting austerity measures of our own. British people haven’t had a sovereign crisis and IMF intervention to convince them of these measures, and they are likely to prove unpopular. Should the coalition face Greek-style resistance to its plans, together with siren voices from the Labour opposition denying that they are necessary, might it fall apart? Or seek to preserve itself by watering down its commitment to reduce borrowing?

Both of these are risks that seem remote at present, but events at home and abroad suggest that they are real. A broken (rather than merely Brokeback) coalition, or a failure to stave off a debt crisis … What price sterling under those conditions?

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