Why Government Uses Fiscal Credibility to Unveil Infrastructure Investment

Posted by : Premraj | Posted on : Tuesday, June 25, 2013

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Last year the UK government announced a scheme to dramatically boost its investment in infrastructure. This scheme, the government claimed, was only possible thanks to the UK’s fiscal credibility, a product of its far-reaching plans for austerity and deficit reduction.The plan, known as the UK Guarantees scheme, was intended guarantee up to 50bn of lending for major infrastructure projects across the country, which has been hit hard by the unavailability of credit. A temporary lending programme guaranteeing up to 6 bn of public-private projects was also implemented. The government cites fiscal credibility as the reason why these projects can be underwritten. However, the question remains as to the overall impact of austerity on the economy as a whole.Austerity ProgrammeThe fiscal credibility which the government claims it has earned is a direct result of the austerity programme implemented in 2010. A wide-ranging series of cuts to government spending, with the aim of reducing the UK’s public deficit, was put into place. The view was taken that this was crucial to keeping confidence levels in the UK economy high as it struggled amid the global financial crisis. This has the effect of keeping government borrowing costs and interest rates low. As a result of the programme, the UK maintained its AAA credit rating until February 2013, while other countries, including the US, lost theirs.

Lack of Public Investment and Growth

While the cuts have had the desired effect and the country’s borrowing costs have remained low, many have argued that the economy as a whole has suffered as a result due to the lack of investment and jobs. Predictions for growth have been lower in the UK than in many other comparable countries, although infrastructure projects have been largely safe from government cuts.

Is Fiscal Credibility Now Reaping Rewards?

George Osborne argued that it was precisely because borrowing costs remain low that the government is now able to underwrite this level of private investment in big projects. He claims that the austerity plan was in fact reaping rewards and benefiting the economy as a whole. His political opponents dispute this and say that austerity has led to a much lower level of growth and that more spending is required to counteract this. The shadow Chancellor, Ed Balls, has said that Osborne’s debt-reduction targets have not been met because spending cuts have stifled growth, which means that the government is not receiving the tax revenues that it predicted.

Weighing the Cost

It is hard to say what the long-term effects on the government’s prioritising of fiscal credibility will be. While projects that benefit from the UKGuarantees scheme will provide a boost to the economy, they have only been possible because of a spending plan that has stunted growth in many other areas. However, one positive consequence of the government’s actions is that borrowing costs have remained low.

About the Author:

Angelina is an economics expert. She writes regularly for a range of financial websites. HER current view is that while the economic climate has been bad news for savers, it has been helpful both to home-owners and those suffering from high debt levels of debt. For anyone suffering from such problems, Consolidated Credit can help those looking for debt solutions in the UK.