A micro example of the govt’s macroeconomic stupidity or worse

I’ve just heard that a small business, which a couple of my friends had set up, has had to cease trading. The company provided and installed high-quality solar panels for households, to allow them to reduce their fuel bills and help the environment by generating electricity that the householder could use directly when needed, and ‘push’ electricity back into the grid when it wasn’t being used in the home. The power generated would qualify for a ‘feed-in’ tariff (FIT) that would reduce the home’s fuel bill, and which would last for 25 years.

This is a small-scale tragedy that also provides a perfect example of the large-scale idiocy, malignancy or both of this government’s macroeconomic ‘austerity’ policies that it claims will turn around or ‘rebalance’ the UK’s economy.

Up to December 2011, the feed-in tariff paid to people who installed the was 43.3 pence per kilowatt (kW), with a 3.2p supplement for any electricity not used but pushed back into the national grid. This meant that the substantial cost of installing solar panels could be paid off in about half the 25-year period of the FIT, and the household could expect substantial reductions in its energy bills from then on – a significant benefit in times when energy costs are only expected to keep rising.

My friends, like many others, started their company to meet the demand that this generated, and the future looked bright.

In December 2011, the government cut the FIT by more than 50%, to 21p, although after legal challenges by the solar industry this was deferred to March 2012. This cut slashed the national demand for solar installations massively at a stroke, from 27,000 to 12,000. Not satisfied with that, in August this year the government cut the FIT again – from 21p down to 16p, a further reduction of 24%.

The result of these cuts? It’s obvious to anyone with a brain, really. Demand was killed, and small businesses like the one my friends started, could no longer find enough work to exist. They’re not generating income for themselves, therefore they’re not paying tax, may need to claim benefits if they can’t find other work immediately – and certainly can’t be thinking about employing anyone else.

All because of actions and decisions taken by the party that likes to style itself as the friend of business, especially of entrepreneurs and small businesses.

Some months ago, I wrote an article about the stupidity of expecting austerity to bring our economy back into recovery, because all it does is suck demand out of the economy – and as someone who works in business, I know that demand is everything, Whatever the other obstacles, it’s simple ‘supply and demand’ – if there is demand for something, companies will overcome the obstacles to supply it, generating profit and jobs.

By contrast, if you kill demand, then no amount of reductions in corporation tax – Osborne’s favourite resort that he claims will boost economic recovery – mean anything at all. They won’t create jobs, they won’t attract investors, they won’t result in more business start-ups – on the contrary, people will lose jobs and become a net cost to the country instead of net contributors. Not because of any fault of theirs (in spite of this government’s proclivity for demonising the unemployed), but because the demand for what those jobs, investments and start-ups would produce or supply is not going to be big enough to make anything but contraction and entrenchment feasible.

Osborne and his ilk love to say that you can’t cut your way out of debt. Well, commonsense and experience, borne out by woeful UK economic performance under this government, show that you can’t cut your way to growth. Taking money out of the pockets of ordinary people – including the unemployed and disabled – who will spend it quickly can only reduce demand, no matter how much you offer tax-breaks to the rich.

If you make the poor poorer and the average poor, ultimately its bad for every business (except maybe the parasites like Wonga) – because economic recovery is all about demand, stupid.

George Osborne is an idiot, but he’s not that big an idiot. So if he knows that the measures he’s taking can only depress the economy and prevent recovery, it can only mean that he has an ulterior motive – to use the continuing ‘crisis’ as an excuse to strip the state to achieve his ideological ends while enriching the Tories’ financial masters in the process.