Stimulus vs Austerity - What is the UK Government's stance?

By Sofia Kaur

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Rishi Sunak unveiled his £30 billion stimulus package back in July leading to millions flocking to restaurants during the ‘Eat Out to Help Out’ scheme in September and the promising idea of lower taxes being proposed. Whilst the government’s economic response may be deemed auspicious, can UK finances afford such extravagant commitments?

Rishi Sunak’s stimulus package was designed to target the growing job crisis and move Britain out of the recession, characterised by -20.4% GDP based on ONS Q2 figures. This included the Job Retention Scheme, which is replacing the Furlough Scheme due to end in October; involving a £1000 bonus for employers who retain employees till January 2021. Furthermore, to tackle the vulnerability of under 25’s to the job crisis, the Kickstart Scheme subsidises wages for unemployed young people hired into newly created jobs. A stamp duty cut, VAT cut and the Eat out to Help Out scheme have also been introduced as fiscal stimuli to boost the hospitality industry and consumption spending within the economy.

Theoretically, the expansionary fiscal policy introduced in response to the recession should prevent the UK from experiencing a deeper aggregate demand contraction and deflation. However, the rising debt-to-GDP ratio as a result of funding the stimulus package is something that should not be ignored and raises the concept of austerity. Austerity may be defined as policies aimed at reducing government debt usually through cutting spending. Rising government debt is problematic as it raises a risk of the government defaulting on its debt due to a higher real interest rate thus requiring greater fiscal tightening. That being said, as would be argued by Keynesian Economists, during a recession if the state limits their budget deficit they are depriving the economy of potential economic growth and pre-recession employment levels. One may argue that in comparison to other countries such as Japan and Germany, the UK stimulus package is relatively low, at just over 1% of GDP. However, we should not ignore the lessons learned from Greece and Argentina who have demonstrated the vast dangers of high debt.

With UK Government debt having exceeded a staggering £2 trillion, austerity looks likely. There are high-levels of speculation that the Treasury are going to increase corporation tax and capital gains tax in the coming autumn budget. This will break the trend of George Osborne’s corporation tax cuts, which has previously give the UK its reputation of low taxes for firms relative to other OECD countries. Increasing tax revenues will help reduce the government’s budget deficit although targeting this towards businesses may create a double-edged sword for the UK Economy. For example, the rise in corporation tax is likely to drastically affect small business the most; coupled with the lack of trade due to lockdown measures we may see more of these businesses being pushed out of the market. Furthermore, a rise in corporation tax often translates to consumers through inflationary pressures on prices; with private debt also soaring this signals an unwanted contraction in demand by consumers.