Stagnation Britain: Osborne has played his hand extremely badly

The statisticians will be arguing about the last quarter’s growth figures for years. Was it really a 0.7 per cent fall in national income, a 0.9 per cent fall or a 0.5 per cent fall? If it were not for the soggy weather and extra Bank Holidays, might we have managed just a 0.2 per cent fall? These issues are, by and large, irrelevant. The big question is whether stagnation has become the new normal. My fear is that it has.

Ironically, on the face of it, we seem to have a well-functioning labour market. The private sector is creating jobs faster than the public sector is shedding them. Also, real wages are falling so we are not falling into the trap that Keynes described of rigid wages preventing economic adjustment.

But the labour market is responding well to a dire situation. Real wages are falling because productivity is falling. Falling productivity plus stable employment equals economic stagnation.

We cannot get out of this position by deficit financing or more government spending. The government is already borrowing over 8 per cent of national income. There is no hole in “aggregate demand” caused by a lack of government borrowing. The government is also already spending around 50 per cent of national income.

And this is the first part of the growth puzzle. Evidence suggests that a ten per cent increase in government spending as a proportion of national income reduces the growth rate by about 1 per cent per annum. If we could add 1 per cent to the growth rates we have been achieving recently, there would have been a quite different growth trajectory – though not transformational. We need to look further.

This article originally appeared in City AM. Continue reading here.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

2 thoughts on “Stagnation Britain: Osborne has played his hand extremely badly”

  1. Posted 26/07/2012 at 13:40 | Permalink

    It is, of course, easier with hindsight. But the current government seems to have fallen into the same trap as so many post-war British governments: it has chosen to assume the most optimistic possible guesses about the future. This has had the effect of not lowering expectations enough. Specifically, the coalition published the notion that further government borrowing might have stopped increasing by the time of the scheduled next general election in 2015. Now the prime minister is talking about the recession possibly lasting until 2020 — but he and the current government have laid themselves open to the ‘blame’ for the ‘extra’ five years.

    As for the cuts in government spending: what cuts? If one looks at aggregate government spending, it hardly seems to be falling. Most of the so-called ‘cuts’ seem to have been postponed until after 2015. So the government has managed to get the worst of both worlds: provoking vociferous opposition to the supposed cuts without any significant actual reduction in government spending.

    The starting point for a macroeconomic analysis must be recognition that total tax revenues cannot be maintained for long at more than 40 per cent of national income, while government spending is currently nearly 50 per cent. To help improve confidence the government should have — and should now — set a target of 35 per cent of national income as a maximum for total taxes in future. Although some of the reduction (improvement) can legimately be hoped for from growth in national income, there do also need to be real cuts in taxes.

    The pathetic failure immediately to reduce the 50 per cent top rate introduced by the outgoing Labour government straight back to 40 per cent set precisely the wrong tone. (It might actually have increased total tax revenues!) Fairly or not, it gave the impression that the prime minister was too timid to set a ‘free market’ direction to his coalition partners, even though a majority of the initial five LibDems in the cabinet were of the orange Book variety.

    I believe the prime minister does deserve credit for not indulging in the far-too-frequent reshuffles of his predecessors; but in his expected first major reshuffle this autumn, he needs to re-establish his authority and set a new, more free market, direction. It is never too late; but time is beginnijng to run out for him, if not for the recession/depression.

  2. Posted 30/07/2012 at 09:09 | Permalink

    The ONS video and text are interesting. Public spending rising in the last quarter prevented the drop in output being even greater!
    A lot of these first estimates are made up of guesswork. I am intrigued by the treatment of the extra bank holiday, which seems to have been considered as a whole day’s loss of output and thus a significant contributor to the downturn in GDP. They drew an analogy with the earlier jubilees. While I can see the sense of this in relation to the production line for widgets being closed down, widgets account for a smaller share of GDP than in, say, 1977. Many service businesses – hotels, restaurants, shops, cinemas – were open as normal and may even have done more business. Newspapers, websites and TV continued as normal. Electricity output probably rose.Small businesses and freelances may also have worked as normal. And people like teachers, say, are paid anyway and presumably do their marking while academics continue to write their papers for the REF….
    I do wonder about the value of these estimates, which I am sure will be revised upwards in due course. They are incompatible with other evidence such as business intentions and, particularly, employment and tax revenue. They just add to gloom and doom, discourage investment, and put pressure on Mr Osborne to abandon his attempts, feeble as they are, to keep public spending under control.

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