By George Kerevan
WHEN asked what kind of generals he liked, Napoleon Bonaparte famously replied: “Lucky ones.” George Osborne proved a lucky politician yesterday when he escaped the embarrassment of being the first chancellor ever to preside over three successive recessions.
The first quarter GDP figures turned out to be not only positive, but a reasonable 0.3 per cent – well, reasonable in a global downturn.
The bad news, of course, is that the UK economy remains absolutely dead in the water. GDP is a hefty 2.6 per cent below the pre-crisis peak of early 2008, while the US economy has already recovered lost ground. Even adding in the growth in the first quarter of 2013, UK output has stagnated for the past 18 months. However Mr Osborne and the coalition spin these latest GDP numbers, the markets know that there is nothing in the Chancellor’s present policies to spark growth – and therein lies the time bomb.
Without growth, tax receipts will also stagnate. Without growing tax revenues, Mr Osborne will have to borrow more, or else resort to even greater austerity. Either way, economic stasis means he is again set to miss his target to eliminate the structural deficit bequeathed by Gordon Brown. Ineluctably, Osborne’s credibility with the markets is beginning to erode – witness last week’s downgrade of the UK’s credit rating by Fitch. Even though the coalition is basically funding itself by having the Bank of England print pound notes, inevitably the financial markets are going to demand higher interest rates. That’s when economic stagnation turns into depression.
The irony here is that Osborne isn’t actually as big an austerity man as Labour paints him. Stagnation and limp tax receipts have forced the Chancellor to borrow and spend more than Alistair Darling promised to do back in 2010. The truth is that Cameron, Osborne and Clegg assumed growth would return quickly. So instead of planning to cut the totality of public spending – which would be politically toxic – they merely aimed at holding annual spending levels where they were. Thus public sector wages were frozen but NHS spending protected.
Lack of economic growth has wrecked this strategy. Osborne was forced to borrow more than planned, bumping up interest payments. To pay these unforeseen bills, genuine cuts are being made in everything else – even though the overall size of the public spending cake has not shrunk. Now we are witnessing cuts in the welfare budget with many more to come after the 2015 election.
An obvious question arises: why is the UK economy refusing to grow, despite a comparatively mild dose of austerity (by international standards) and despite the Bank of England engineering a 20 per cent fall in the value of sterling to make exports cheaper? The fundamental problem is that the UK is still hamstrung by the gargantuan debts built up in the early part of the millennium, coupled with the legacy of Gordon Brown’s desire to fete City bankers while letting British manufacturing decline.
The private debt overhang means consumers won’t spend. Banks won’t lend because they are building up capital reserves after the disaster of 2008, when they acquired too much bad debt. Even if Labour’s Ed Balls became chancellor tomorrow, he could not borrow enough to make more than a marginal impact on the economy because the markets would panic at adding to the National Debt. Exports will not replace this dearth of domestic demand, even with the cheap pound. Europe isn’t buying because of its currency crisis, while the Chinese make their own stuff. Worse, our manufacturing is uncompetitive because of poor productivity and the narrow range of goods Britain has to offer.
Everyone, from the IMF to the Archbishop of Canterbury, is telling Mr Osborne to abandon austerity and spend more. He won’t. Instead, he’ll use the latest GDP numbers to stick to his guns. If Mr Osborne has a plan to get out of this mess it relies on Mark Carney, the new Governor of the Bank of England, printing lots more pound notes. That’s not as desperate as it seems. The US central bank has engineered a rise in confidence among American consumers and businesses by announcing firmly it will pump billions of fresh dollars into the economy every single month until unemployment comes down. Carney could do the same here. Japan has also decided to escape 20 years of stagnation by resorting to the printing presses.
The danger with such a monetary strategy is that it is potentially inflationary. Faced with a choice between stagnation and inflation, many folk will go with the latter, myself included. But this is a high-risk policy, especially as the UK is more inflation prone than other industrial countries thanks to business monopoly. If inflation got out of control it could trigger industrial unrest and send interest rates into the stratosphere. Mark Carney might well decide this is too much of a high-wire act and play a more conservative hand. That would leave Mr Osborne nowhere to hide.
Alternatively, the Tory right – emboldened by the late Mrs Thatcher’s elevation to sainthood – might demand real spending cuts, in a bid to eliminate the debt and reboot the economy. I can’t see the Lib Dems allowing this, but it has logic. Let zombie firms and banks go bust so resources and labour can be transferred to productive uses. Cut income tax massively for the low paid to boost consumption, funded by cuts in welfare spending. Eliminate the structural deficit instantly by slashing public spending, thus winning back the confidence of the financial markets and foreign investors. GDP would contract sharply but you could be back to serious growth – say of 3 to 5 per cent – inside three years. Assuming civil war did not break out, that is.
The truth is that the latest GDP numbers have changed nothing. We have a weak government that confuses rigidity for a strategy. In this situation, doing anything trumps doing nothing.
Courtesy of George Kerevan and the Scotsman newspaper