With Britain facing a possible triple-dip recession, it’s time the chancellor ended his fixation with debt and tackled the other two elements of the economic crisis
The UK economy faces a triple economic crisis: stagnation, debt and imbalance. The coalition government’s efforts have been disproportionately designed to tackle just one of these three problems – debt – and then only debt in the public sector. Its efforts on growth have been underwhelming and it appears to have abandoned any attempt to significantly rebalance the economy.
Chancellor George Osborne should spend little time in the next few months worrying about the Spending Review for 2015/16 – that can be delayed. Instead, he should devote all his energies to devising a set of policies for the March Budget that will deal with all three elements of the crisis.
It is now almost five years since the economy went into recession and the stop-start nature of the recovery has left real gross domestic product still some 3% below its peak level. The past five years have been the worst for the economy since the 1930s and economists are speculating about the possibility of an unprecedented ‘triple-dip’.
Meanwhile, public debt has doubled from £535bn at the end of 2007 to £1,111bn at the end of 2012 (excluding financial interventions) and is set to increase further to £1,500bn by 2017. Household debt remains at very high levels. Although the ratio of debt to disposable income has fallen from 170% in 2008 to 150%, this is wholly the result of income growth rather than of households paying off their debt.
The economy also remains very unbalanced. Growth has not, as hoped, been led by exports and business investment. The UK’s current account deficit in the first three quarters of 2012 amounted to 3.7% of GDP, and the deficit for the whole year is likely to be the largest since 1989. Business investment has undershot the Office for Budget Responsibility’s forecasts by a substantial margin in each of the past three years.
The coalition does not deny that its economic policy priority is cutting the deficit and eventually getting public debt falling as a percentage of GDP. It has stopped claiming that this will boost growth in the short term but still refuses to accept that taking demand out of the economy has contributed to its stagnation.
The government can point to a long list of initiatives it has taken to stimulate economic growth: from micro-measures to support specific industries, such as the £21.5m investment fund for graphene research announced in December 2012, to macro-policies such as cutting corporation tax. Despite these measures, even business groups like the CBI, which might be regarded as natural supporters of the government, have criticised its efforts on growth. On more than one occasion in 2012, CBI director-general John Cridland called on the government to do more to boost growth.
The government’s failure to do this is the result of a misdiagnosis of the problem, and hence the application of the wrong remedy. Many of the measures it has taken might have a positive effect on the supply-side of the economy – its output capacity – but the UK already has plenty of spare economic capacity. The problem is a shortage of demand: the result of spending cuts, slower growth in demand from Europe for UK exports, low levels of business confidence and a squeeze on households’ real incomes. If the government is not prepared to address this problem directly through extra public spending or tax cuts, it is unsurprising that its other measures are proving ineffectual.
As a result, the government is now desperate for growth of any kind. Where once it proclaimed that growth should no longer be led by debt-fuelled consumption, but rather by exports and investment, it now announces policies – like the Funding for Lending scheme – that are specifically designed to make more credit available to households.
Of the three elements of the triple crisis, public (but not private) debt remains its overriding priority. It appears to be hoping that something will turn up on growth; and there is little to suggest it cares about imbalances in the economy.
