Coalition is flailing, failing and lacking direction
My Tribune Money Matters column
The debates ahead of this week’s Budget seemed to take place in a mood of complacency. It is true that optimism about the economy has increased since the autumn, especially in financial markets. It is too early to tell if that optimism is justified. What is clear is that choreographed Coalition debates about 50p tax rate cuts and ‘tycoon taxes’ missed the point. The UK economy faces some tough challenges which need decisive government action, not just on one Budget day but running through policy all year round.
Over the summer Western economies suffered a shock to economic confidence. The US struggled to agree a budget and Eurozone countries appeared stuck in deadlock over how to deal with their high levels of sovereign debt, particularly in countries such as Greece and Portugal. Deals were done in the US, which kicked the problem forward a year and a half. The Eurozone was not so nimble but in November a treaty was signed and the European Central Bank stepped in to boost liquidity in the banking system. The economic data show that growth suffered in October and November but probably picked up in December. That has been evident in manufacturing surveys. Recent data have been mixed but do confirm so far the view that the US economy is recovering, aided by less extreme moves to embrace austerity. The UK economy was not immune to the slowdown but has also seen an improvement since last year, so far as we can tell from the latest information. Before we get too optimistic, we should note that we are not talking about anything like a return to trend growth. Indeed, post the financial crisis no one is really sure what that means. Some worry that without the right policies we will face a Japan-like scenario, with low growth for years.
The UK economy is going through a ‘quiet recession’. Unemployment has not soared above three million, at least not yet. We are not witnessing the death of large-scale industries as we did in the 1980s. We have not seen the prevalence of unemployment across society that seemed characteristic of the 1990s recession. Yet living conditions for most people are tighter than they were a few years ago and job losses continue. For young people, the outlook appears bleak. Not only are more than a fifth out of work, a study by the Financial Times suggested that young peoples’ living standards will be worse than their parents’, the first time this has happened for generations.
There may be some respite later this year. Many economists expect income available after food, fuel, housing, and taxes to increase for many households later this year. That is because the inflation rate is falling. However, this is not guaranteed and if oil prices were to rise significantly for example that could reverse any gains. Meanwhile average earnings are currently increasing at a rate of less than 2% per year (unless of course you are a FTSE 100 executive).
The central problem we face, along with other economies adopting austerity measures, is a lack of investment. Many larger companies have very strong balance sheets, which they built up in response to the banking crisis. The consequence is that they have reined back on investment in new projects. This is probably for two reasons. First, they worry that a new round of the banking crisis could choke off funds. Second, the outlook for sustainable growth is poor. When the government talks about ‘austerity’ the message it sends to business is that it is putting deficit-cutting ahead of growth. While financial market investors demand austerity measures, it is clear that you need to be credible on both deficit-reduction and growth. This Tory/LibDem government has yet to demonstrate it has a growth strategy that is more than a collection of initiatives; the record of its previous pro-growth announcements is not encouraging. While credit support for business should be useful, it will be of little help if businesses are too anxious to invest. If growth prospects are damaged, so will be the government’s ability to cut its debt.
The uncertainties are enormous. The Office for Budget Responsibility pointed out in its autumn report that the 1990s recession was much less deep than was thought at the time. Of course, the over three million people unemployed were real enough. Making economic policy is not easy. That is why fine-tuning and tweaks to tax rates and credits here and there are no substitute for a sense of clear direction. Reports suggest Vince Cable, the Business Secretary, believes this has been lacking. The leaks and announcements ahead of the Budget certainly gave the impression of a government flailing around, looking for a central message. This presents Labour with an opportunity as it spends time engaging with business. It needs to show that in government it will be genuinely committed to both investment and cutting deficits.
First published in Tribune Magazine on 23 March 2012.
Central banks are struggling to head off general inflation while dealing with price shocks that will be negative for growth. They waited too long, which has made their tasks more difficult.