Bouncing along the bottom of the ‘L’
The economy is stuck -we’ve had nine months of near stagnation and the prospects for the next two years look grim.
Even excluding ‘temporary factors’ (warm weather, cold weather, tsunamis and royal nuptials) the economy only managed 0.7% growth in the past nine months – a pathetic recovery. As the NIESR have noted this is an historically weak recovery – the only real precedent being the 1930s.
The causes are varied – an over indebted consumer sector who are experiencing falling real wages, falling disposable income and lack confidence. Companies which are cash rich but reluctant to invest, banks which simply aren’t lending to productive businesses, weak export prospects with our major trading partners dealing with their own crisis.
The real austerity hasn’t yet been felt economically – sure the VAT rise has sucked some demand out of the economy and contributed to falling real wages and Osborne’s doom and gloom talk has depressed confidence, but the real impact in terms of public spending cuts is just being.
The regional picture looks even worse with what little growth there is concentrated inLondon and the South East.
So far the government has managed to stop the recovery dead in its tracks but made little impact on the deficit.
‘Expansionary fiscal contraction’ seems to be more contractionary than expansionary.
We can argue about the multipliers of government spending and how effective a second stimulus might or might not be, but what seems clear to me is that cuts in government spending will subtract from growth. Policy makers may or may not be able to spend their way out of recession – but they certainly can’t cut their way out of one.
The right has come out with its preferred growth agenda – dismissed in detail by the TUC’s Nicola Smith here – and it contains few surprises. Attacks on the minimum wage, the welfare system and calls for cuts in red tape and corporation tax – this isn’t their growth agenda, this is simply a repetition of their own long standing prejudices.
The core issues are how we get the corporate surplus down, the banks lending (to the right sort of business), investment increased and demand restored. Get this right and the deficit will start to come down.
Ed Balls proposals for a temporary VAT cut and small investment led stimulus funded by a bonus tax has much merit but isn’t enough to deal with the serious issues we face. I’m less convinced by Cable’s calls for more QE (without radical reform) and don’t see the logic at all of Osborne’s reported desire to cut the 50p rate.