Broken Britain worse off after Plan A fails

Euro Zone: Yesterday's strike by public sector workers dealt yet another blow to Britain's struggling economy. Gulf policymakers must take note of the country's predicament.

Public sector workers in Britain staged a strike to protest the government's proposed cost-cutting changes in their pension plans. Gareth Fuller / AP Photo

Viewed from London, the economic scene is one of unremitting gloom.

Road to ruin or recovery?

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It is difficult to overstate the pessimism with which most experts view the future.

Grim, shocking, dire and unsustainable were some of the adjectives used in reaction to the UK government's autumn financial statement. Britain, it was announced in parliament, had the highest structural financial deficit in the West, and the largest in its history outside the two world wars.

The coalition government of David Cameron, the prime minister, had to admit its economic master plan, drawn up just 18 months ago, had failed; Britain could not balance its financial books by 2015, as had been promised; debts would 8 per cent, or £112 billion (Dh639.79bn), higher by then.

The economic consequences are inevitably grave. Growth will fall to less than 1 per cent this year and next, lower than any Organisation for Economic Cooperation and Development country apart from Japan. With the margin errors that have taken place even in the past six months, this is as close to outright recession as makes no difference.

Unemployment will rise to about 9 per cent next year, while the retirement age is to be gradually raised to 67. Public sector workers are to be held to 1 per cent pay rises, while inflation is 5 per cent and rising. For the next five years at least, it will be blood, sweat, tears and austerity. All this as the country suffered a virtual general strike from public sector workers yesterday. Greek-style civil confrontation cannot be ruled out.

And, from the perspective of the independent office of budget review, all this is a best-case scenario. As George Osborne, the chancellor, admitted in parliament, his shocking sums could be thrown further into the red by a final crisis in the euro zone, which many now believe is imminent.

Britain prides itself on having stayed out of the euro, but its isolation will be no proof against a break-up of the currency, a default of a big sovereign borrower such as Italy or Spain, or the sudden collapse of a big bank to spark a Lehman-style financial freeze. The signs are there already.

With 45 per cent of its trade done with euro-zone countries, and the dominance of London as a financial marketplace, Britain would be as badly hit as any of its continental partners. A deep euro-zone recession led by the financial sector would be the worst possible turn of events for Britain just now.

What went wrong? The government admits it underestimated the effects of the 2008 financial crisis, but blames the previous administration for running "unsustainable" policies during the boom. The Labour opposition has been quick to point the "told you so" finger. It warned the government's "Plan A" (public sector spending cuts mixed with quantitative easing) would strangle the economic recovery most experts, including the IMF, forecast last year.

The problem is Labour does not have a viable "Plan B", other than higher public sector spending fuelled by more borrowing. Bizarrely, that has also become the government's new strategy, imposed in default by the crisis.

There is a "back to basics" philosophy emanating from all politicians that recalls the days when Britain was the industrial powerhouse of the world, manufacturing and exporting its way to wealth, long before the age of financial engineering.

The policy now is to emphasise the impact that infrastructure spending can have on the UK economy; new roads, railways and airports, with an impossibly ambitious house-building programme, are regarded as the long-term way out of the mess. There are two problems with "Plan A plus", as the "new" strategy has been called. First, there is no obvious link between higher infrastructure spending and export-led growth. You cannot export a motorway.

Second, it has to be paid for, and in such desperate financial circumstances it is hard to see where the investment comes from, apart from more borrowing.

Policymakers in the UAE and the Gulf might take note of three particular aspects of the UK's predicament. The first is to be aware of the dangers of cutting back too far and too fast; energy-rich economies such as Abu Dhabi or Qatar do not need to impose austerity regimes, regardless of the financial orthodoxy.

Second, an export-led "back to basics" philosophy, with a stress on infrastructure investment (the chosen recovery path for Dubai), requires careful financial planning.

Finally, all strategists in the Gulf states should be working day and night on contingency plans for the looming financial collapse in the euro zone.

That disaster would shatter Britain, but the aftershocks would be felt worldwide.