The Telegraph reports that these cuts and tax increases are necessary to bring the national debt under control. The national debt that ballooned as a result of the activities of the banks leading up to the financial crisis and the choice to protect meaningless bank book capital levels after the financial crisis struck.
By not adopting the Swedish model and requiring the banks to recognize the losses on the excesses in the financial system, policymakers transferred these losses to the real economy.
At the same time, by not requiring that the losses be recognized, policymakers created 'zombie' borrowers who distort pricing in the real economy. In addition, policymakers also distorted pricing in the financial markets by engaging in zero interest rate policies and quantitative easing.
Showing the capacity to make a bad situation worse, policymakers then focused on austerity. If ever there was a clear message to save, this was it, as clearly any retirement benefits provided by the government were now open to be cut back.
Keep in mind, since the beginning of the financial crisis, policymakers have had the option to adopt the Swedish model, restore the economy to health and end the threat to the retirement benefits.
The Coalition’s current austerity programme will not be enough to bring the debt down to “prudent” levels, the Organisation for Economic Co-operation and Development said.
An additional and “sustained period of fiscal tightening” will be needed....
As a sensible precaution against future crises, the OECD said the developed countries should have a long-term goal of bringing debt down to 50 per cent of GDP.
For Britain to hit the target will require austerity measures equal to about 8 per cent of the economy, it was calculated. That is about £126 billion in today’s prices, roughly equal to the scale of the current austerity package.
But the costs arising from the recent financial crisis and economic downturn will be relatively minor compared with the long-term costs of an ageing population, the Paris-based forecaster said.
“Spending pressures, principally from health and long-term care, will continue to mount,” the OECD said in a study published yesterday.
Because higher taxes “adversely affect economic performance” a large part of any future debt-reduction work should come from cuts in public spending.
As well as reforming their health, education and pension systems, governments should seek to rein in spending on benefits and increase the financial incentives for people to work and save.
People can thank the elected policymakers and the unelected financial regulators for staying with the Japanese model for handling a bank led solvency crisis as health, education and pension benefits are stripped away.
Remember, the only beneficiaries of the Japanese model are the bankers.