By Russell Bruce
I speak of George Osborne and Danny Alexander presently running UK economic policy. Day by day the pressures ratchet up for a major reshuffle as the gloom forecasts for UK plc look ever more pessimistic.
A series of major articles in the National Institute Economic Review do nothing to dispel the large question marks over the direction of policy or the belief that those leading the austerity charge actually have coherent and practical solutions to deal with an economy caught in the vice of a cut and slash agenda.
The current recession is now set to outlast the Great Depression of the 1930s and that is the view from many sources. David Blanchflower writing in the New Statesman 18 months ago modelled the recession course on a trajectory that indicated the we were heading for the longest recession in modern history.
Three weeks ago the National Institute of Economic and Social Research (NEISR) published summary tables of quarterly growth for every month from Jan 2011 to June 2012. Over 18 months the rolling quarter analysis indicated Gross Domestic Product (GDP) shrank in eight out of those eighteen months. Even more significant is the trend direction, with negative growth in six out of the seven most recent months.
The latest edition of the National Institute Economic Review looks in some detail at the prospects for the UK economy. The headline findings are:
• The economy will contract by 0.5% in 2012, but grow by 1.3% in 2013
• Consumer price inflation will fall below 2 per cent by the end of 2012
• Unemployment will peak at 8.6% in 2013
The authors note that although there has been a deterioration in the Euro area in the last three months they emphasis that this is not the predominant cause of UK economic weakness. Output has been flat for over two years and the situation has been exacerbated by UK government policy actions: raising taxes, cutting payments to households and the reduction in pubic sector investment and employment.
When demand in the economy is weak these actions reduce demand by taking money out of the economy, consumers tend to save more as a result and business does not invest as demand is falling, unemployment then increases as there is reduced demand for the goods and services these employees would have produced.
The authors also note a surprising strength in employment compared with previous recessions. At the beginning of the 1970s male employment stood at 90% and is now around 73%. In the same period female employment has risen from around 53% to 65%.
The rise in female employment cancelled the fall in male employment so the figures for all those in employment in the 16 to 64 age group, is fairly constant constant at just above 70%. These changes combined with an increase in younger people in full time education and fewer jobs for unskilled males may explain part of the relative strength of the labour market.
In their summary of the outlook for the UK, the authors note ‘the continued weakness of the UK economy reflects both a lack of demand and the supply-side constraint of an unreconstructed banking system.’ Although they welcome some recent initiatives to encourage bank lending they do not see these policies as a substitute for ‘a clear plan for the financial infrastructure the UK economy requires’ rather than the piecemeal approach adopted.
They conclude ‘It remains the case that there is scope for a less aggressive path of fiscal tightening. The government should consider on-balance sheet funding of key projects, concurrent with a comprehensive restructuring of banks and key funding markets.’
At international level, world growth is expected to slow to 3.3% in 2012 and 3.7% next year. In 2013 the 1.3% growth in GDP for the UK compares well with the 0.5% for the Euro area and 0.9% for EU27.
But when we look at NIER estimates of growth in northern European countries, all do better than the UK. Germany, Denmark and Norway are expected to see growth of 1.7%, Finland 1.9%, Sweden 2.2% and Estonia, with little more than a quarter of the population of Scotland, is projected to grow by 3.8%.
The percentages might seem small but the difference with the UK is far from small because all these counties will see growth in GDP, according to the tables, this year against a decline of 0.5% in the UK. So the increases in these northern European countries GDP in 2013 are on top of the growth in 2012.
UK government debt as a percentage of GDP, based on the Maastricht definition for EU countries, shows UK debt at 67.8% in 2009, rising to 88% this year, to 94.1 % in 2013 and marginally reduced by 2018 to 93.5%
For comparison Swedish government debt in 2009 was 42.6% and has reduced steadily to 37.8% this year and is projected to fall to 30.4% by 2018.
The next time you hear a UK government minister blame all our troubles on Europe just remember that UK government debt as a percentage of GDP is projected to be higher by 2018 than all but that of only four other EU countries.
The National Institute Economic Review is published 3rd August