The United Kingdom’s political system contains extremely few veto points, so newly elected governments are able to test out theories with a relatively free hand. A British government that thought fiscal stimulus was the way to go would have done a lot of stimulus. But instead Britain got a government that went all-in on deficit reduction, austerity budgeting, and the confidence fairy. It hasn’t worked out, so naturally some ministers are now grumbling about the architects of the austerity budget strategy behind their back.
The key policy failure, however, is this fantastical belief in the power of exports:
The chancellor hopes the cheaper pound will help to spark a long hoped-for “rebalancing” of the economy, with growth coming from exports, instead of debt-fuelled spending: in his budget, he promised to build an economy powered by “the march of the makers”. Manufacturing has indeed been one of the few bright spots amid the gloom, aided by the depreciation of sterling, which is worth about 25% less against the currencies of the UK’s major trading partners than before the credit crunch.
Trade just isn’t important enough to a medium sized rich country for this to work. In 2010, exports were only about 5 percent of the UK’s GDP. Rebalancing to push that number up is a fine idea, but there’s no plausible pace of export growth such that it can make up for a sharp drop in domestic consumer spending, which accounts for a much bigger slice of the overall pie. The only candidate that could plausibly step in and fill that consumption/housing void was the government. But instead the government cut back, creating a situation where no export boom could possibly solve the problem.
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