The Return Of Growth - The Celebration Of A Tragedy

Enough time has now passed for there to have been much sober analysis of George Osborne's Autumn Statement. One thing I must confess that I missed at first, probably because it didn't feature in the fanfare of celebration that greeted the upward revisions of his growth forecasts for 2013 and 2014, was the downward revisions of his forecasts for 2015, 2016 and 2017. Growth in 2015 is now expected to be lower than that in 2014. This explains why the so-called 'return of growth' has not done much to improve the Chancellor's deficit reduction projections and why he hasn't taken his foot of the austerity pedal.

Much has been said about the quality and sustainability of this new growth. Many are concerned that it is based on rising consumption, lower savings, falling real incomes and inflating debt bubbles. These concerns have been summed up beautifully by Ann Pettifor in her description of the UK economy as 'Alice in Wongaland'. Some point out that some 6 years later, the economy is still 2% smaller that it was when the crisis began in 2008, making this the slowest recovery on record. What doesn't get quite so much of an airing is the fact that currently the UK economy is some 15% smaller than it would have been if it had continued along its post-war growth path. Simon Wren-Lewis has this chart on his blog in one of his recent posts (see here):

He suggests that this is maybe something that the Labour Party would find useful. I think he is right. What it shows is the pattern of growth per person in the UK since 1955. What is clear is that growth generally sticks very closely to the trend, except during recessions when the economy contracts. Following a recession growth returns but stronger than the trend so that the economy flicks back onto it long term trend growth path as the lost ground is recovered. The exception to this is the current 'Great Recession'.

What is interesting about the recent Autumn Statement is that Osborne is only predicting a return to trend levels of growth, around 2.5% a year, from next year until 2018. That is, the Chancellor himself is saying that the best that the Coalition can do, unlike what's happened after previous recessions, is return us to trend growth, but at a lower level. Or to state it more plainly, Osborne is writing off that 15% of GDP that we lost through the crisis of 2008 and the austerity policies that led to the flatlining of 2010-12. We aren't getting back to that world. 15% of GDP is over £200bn. That's £200bn lost from the UK economy. Oh, I mean that's £200bn lost from the UK economy every year. To put this is context, the Government's annual deficit is around £120bn. How much additional tax revenue would an extra £200bn of national income bring in? Certainly enough to reduce the deficit down to a fraction of its current level and obviate the need for the scale of austerity that is currently being imposed upon us.

If we view things like this, then the Government's continuing deficit represents the failure of the Coalition to deliver the post recession spring back in GDP growth rates that we saw after the recessions of the Thatcher and Major governments. It makes the celebrations of a week or so ago seem rather comic. Indeed Paul Krugman has likened their behaviour to an old Three Stooges sketch where one of trio finds another banging his head against a wall. When he asks why he is doing it he says, 'Because when I stop I feel so much better'. I prefer to see the Coalition as a Football Manager under whose leadership and guidance his Premier League team were relegated 3 seasons on the trot. Miraculously he manages to keep his job as his team starts playing in League Two. Then, after a run of a few decent results, he calls a press conference at which he announces to a stunned nation that these results demonstrate a resounding vindication of the winning strategy he has been pursuing for the last 3 years.

It is of course more tragedy than comedy as the lost 15% or the lost £200bn are not just numbers on a page but real people's lives. People struggling without jobs, without enough decently paid work, struggling with falling living standards and trying to make ends meets with visits to foodbanks and payday lenders. And the real crime is that it didn't need to be like this.

Happy Christmas.

Why Work Doesn't Pay.

Welfare goes up in recessions as the so-called automatic stabilisers kick in to protect the poorest from increased deprivation. Indeed the Chancellor pointed to this effect as an explanation of why the deficit wasn't reducing as fast as he had hoped when his Plan A austerity strategy was failing to deliver growth. Now growth seems to have returned as he has abandoned this policy in favour of a Plan B that includes a slower pace of deficit reduction and a fiscal stimulus to reflate the domestic housing market that the economist and former member of the Bank of England's Monetary Policy Committee, David Blanchflower, described in his article yesterday's Independent as the 'Help to Raise House Prices Scheme'. No doubt the renewed optimism that this increase in growth has fired up lays behind last week's promise by the Chancellor to find 'billions of pounds of welfare savings'.

Where he plans to find these savings remains unclear. If you look at the chart below you will see that we spend around £160 bn a year on welfare. Yet almost half of this is spent on state pensions and the Coalition will be hard pressed to reduce this given our aging population and their commitment not only to exempt it from the austerity cuts, but to restore the link between earnings growth and pensions rises.

The next biggest welfare benefit weighing in at almost £17 bn a year is housing benefit. Initially the Coalition, no doubt influenced by the views of Ian Duncan-Smith and his Centre for Social Justice, appeared to assume that as the economy bounced back to growth, as was normal after recessions, employment would rise and getting people back to work and off benefits, with the help of a carrot and stick approach, would ensure that the welfare bill would reduce. Indeed in the early days of this government the media was full of stories that seemed to suggest that there was a view held by many that work-shy shirking was at the root of the welfare bill. The fact that half the bill was accounted for by pensioners who were collecting the pensions they had paid in for during their working lives seemed to have passed them by.

The Tories’ War on Welfare has had the positive effect of waking us up to the inconvenient truth that an awful lot of the benefit bill goes on paying benefits to people in work. The final rousing from our collective stupor must surely have come when the Government’s own Commission on Social Mobilty and Child Poverty reported in October. The Commission, headed by former Labour Cabinet Minister Alan Milburn but also including the former Conservative Cabinet Minister Gillian Shepherd, found that two thirds of poor children are now from families where an adult works. Working parents in Britain, ‘simply do not earn enough to escape poverty,’ Milburn said and child poverty is, ‘no longer a problem of the workless and the work-shy’. 

The elephant in the room is that many of these families are in receipt of housing benefit because rents are so high, especially in London and the South East. I will conclude with a few sobering facts. If you manage to get a full time job in London on the London Living Wage of £8.80 an hour, then you will be earning around £18,000 a year for a 40 hour week. This is gross of course, that is, before deductions for tax and national insurance. In Lewisham it costs around £1,500 a month to rent a three bedroom house from a private landlord. That’s £18,000 a year. It costs around £400 a month to rent a 3 bedroom property from Lewisham Homes, the organisation that manages Lewisham Council’s homes. Perhaps if we had more of these to rent out to our poorest residents, they wouldn’t need to claim so much in housing benefit. So maybe if the Government wanted to reduce the welfare bill it would gives us more money to build more Council and Housing Association homes. Too bad then that since coming to power the Coaltion has done the opposite.

Is Austerity Working?

Over the last few months the tide of economic reporting in the media seems to have changed. Stagnation and flatlining are out as recovery and growth are back. This culminated in the euphoric headline of a piece by the normally measured and steady David Smith in today's Sunday Times, 'NO MORE ARGUMENTS. AUSTERITY IS WORKING'. I have to confess to have been rather taken aback by such exuberance, especially as the data that has been released didn't appear to warrant such an unequivocal conclusion. The view seems to be that because growth for this year is going to be bigger than originally forecast and forecasts for the next few years have been revised upwards, then stagnation is over, the Coalition's Austerity policy has triumphed and George Osborne has been personally vindicated, his critics vanquished.

Yet Stephanie Flanders writing in the FT this week reminded us that although growth forecasts for this year and next have gone up in “the biggest upwards revisions since the millennium”, this is a rather selective viewpoint. In fact, if we go back to the last Autumn Statement, then the Chancellor was expecting growth in this year to come in at 1.2%. Last week he revised this up to 1.4%. Does a 0.2% outperformance really deserve such a fundamental change in the reporting of the economic weather?

And what of the upwards revisions to the GDP forecasts for the next few years? Granted this is good news, but you would think that serious commentators would greet these with a little more caution, bearing in mind that the Government's record on managing the UK economy up until now has been one of failing to hit any of its growth forecasts. Until last week the Coalition was always promising low growth this year and higher growth thereafter, a story of just bread for now, but definitely jam tomorrow. But tomorrow never came. And indeed it still hasn't. It will really definitely arrive next year. I hope it does.

I am doubtful but let's assume that growth is now assured, does this really mean that, as David Smith said, all this has come without Osborne abandoning his austerity programme? In truth, the Chancellor made up his programme as he went along. Following his first Budget in 2010, he had to announce more austerity for the next Parliament in subsequent Budgets and Autumn Statements and he continually missed his own growth forecasts and borrowing targets. This consistent failure led him to abandon his austerity target to eliminate the structural deficit in this Parliament. The jury must be still out as to whether he will meet Labour's pre-Election plan to merely half it. This is particularly telling as he claimed that this was too slow and would mean that we were in danger of 'doing a Greece'.

But surely the biggest proof that Austerity as originally conceived has been abandoned was Osborne's panicked decision to embark on a massive programme of fiscal stimulus, because surely that is what Funding For Lending and moreover Help to Buy are? Under Help to Buy the Government is providing up to £120bn of taxpayer backed guarantees to reflate, some would say inflate, the UK property market. When the economist Larry Summers was asked about this he noted with a wry smile that one of the things you learn early on when you study finance is that when it comes to risk, the provision of a guarantee puts you in the same position as if you had borrowed the money yourself.

So what is clear is that if growth has returned it is in no small part due to the the Coalition performing a U-turn on both its original Austerity plan and its stance on Keynesian fiscal expansion. This begs the question: 'if you are willing to stimulate the economy using fiscal policy, what is the best and most productive way of doing it?' Those of us in local government have seen the Coalition government cut public subsidy to public housing by 60%, as part of their initial plans to cut us back to growth by slashing public sector capital spending and we have seen how this is drastically reducing the amount of social and affordable homes that developers can afford to build. They could have decided to restore this. At the very least they could have provided £120 bn worth of guarantees to underwrite additional borrowing for Council's and Housing Associations to build more home that people could afford to live in without the need for a public subsidy in the form of Housing Benefit. I think it is a mistake and a terrible shame that the government essentially has decided to cut a subsidy that built homes for the most needy and replaced it with a subsidy that enabled more private homes to be sold to the least credit worthy and most vulnerable borrowers.

I haven't said anything about the sustainability of our current 'recovery'. I'll save this for a later post. However, I thought that it was rather ironic that opposite David Smith's regular column in the ST's Business section entitled 'Growth up, deficit down – what's not to like?', the paper had decided to run a piece by Oliver Shah about fears that London's prime property market is a bubble ready to burst called 'POP GOES LONDON?'