Every cloud has a stormy lining
Economics, to me, is like art; I can appreciate it, I can discuss it, even argue about it but I can’t really do it; as the following paragraphs will probably go to show.
I attended a conference at the end of last week which contained a number of presentations and conversations about the economy. It changed how I think about things quite substantially.
On the one hand, while we face huge fiscal challenges and the austerity programme is already causing pain, I concluded that the straight jacket we are in may not be at tight as is usually presented. For a start, the scale of the fiscal challenge depends a great deal on the estimate of how much of the deficit is structural – the more scope we judge there is for the economy to grow without inflation the less we should be worried about the medium term sustainability of public debt. A speaker at the conference said he had heard convincing estimates for the size of the output gap ranging from zero to six per cent of GDP. Second, adding a year or two to the timeframe for cutting the deficit (as George Osborne has already done) can make quite a difference to the speed at which cuts need to be made. Third, as the muted market reaction to the decision of the heavily indebted Japanese Government to inject yet more cash into the economy suggests, international financial markets seem right now more concerned about growth – or the lack of it – than debt.
When economic debate isn’t focussed on the deficit it tends to focus on growth. The implication is that if only we could have a few years of two or three per cent growth – perhaps spurred by a temporary tax cut or some infrastructure spending – then we would be well on the way to recovery. But this belies the deeper nature of our economic problems.
For example, we continue to be the most privately indebted of the OECD countries, a debt concentrated disproportionately in the lowest income groups. There is simply no way for the poorest to get out of debt, because even if the economy did grow a rise in interest rates would plunge over the edge millions who are only just managing to meet interest charges. As ministers desperately scan the sky for rays of sunshine the clouds are continuing to gather over these families with welfare cuts and rising transport and utility charges (water becomes the latest today).
Back out in the economy at large, there is the huge decline in productivity which has occurred in the last few years, from the already modest base line at which we started when the credit crunch hit. This may in turn help to explain why after a twenty per cent devaluation in the pound in the last few years we are still experiencing a huge balance of payments deficit, one which would be substantially worse were it not for the contribution of the publicly-reviled financial services sector.
At this point we might add to the list the continuing hollowing out of the labour force leaving an ever bigger gulf separating the low productivity low pay service sector from the professional and managerial classes, and the latter from the global plutocracy who now use central London property as a massive piggy bank. And even at the scientific top end of the economy on which so many ministers seem to rest their hopes, there is both a decline in research and development investment by big firms and problems with translating Government intentions and funding for innovation into anything like the scale of new invention and enterprise needed.
There are three ways of looking at this (there always are). The basically complacent one I have described; with a bit of pushing and shoving growth will return. Then there is the gloomy one suggesting we have entered an era of low growth, stagnant living standards and a declining public sphere. The third is that in the face of all of this we need not only to think much more profoundly and talk much more openly about our economic challenges, but also to be willing to do some genuinely innovative things in relation to policy on tax (maybe a ‘use it or lose it’ tax on corporate balance sheets), spending (making tough decision on less productive public spending so more can go to those things which boost employment and skills), employment (an urgent national crusade to end long term youth unemployment), training (by 2020 every job should be a learning job), investing assets (using social housing receipts and public sector pension for productive investment) devolving to cities (implementing the Heseltine report and strengthening city regions).
To be honest, I don’t know all the pros and cons for these six ideas, and even if I did I might not understand them. But desperate times require desperate measures and, be in no doubt, for the UK economy these ARE desperate times.