In his column in yesterday’s Sunday Times, David Smith reminds us that it is only 10 days until the Budget, but you could be forgiven for thinking it has been cancelled bearing in mind the complete absence of the usual pre-budget speculation. According to him, even the Treasury seems reluctant to talk about it. He does believe however, that when the budget is delivered we will hear a lot about how ‘the government’s plan is working.’
What plan would that be, exactly?
The economy has suffered 4 years of swingeing austerity, equivalent to more than a 5% cut in GDP according to the Office for Budget Responsibility (OBR), based on a belief that if state spending was cut, then the private sector would more than expand to fill the gap, thereby delivering net growth to the economy. However, what belief in this doctrine of ‘contractionary expansionism’ has produced so far is an economy that remains smaller than it was before the crisis, with levels of construction and business investment still struggling to get back to the levels they reached under Labour in 2010. Smith has been increasingly upbeat about the economy’s prospects in recent months, yet even he concedes that, ‘Every housing gathering I attend….rightly bemoans the low level of house-building.'
Austerity was supposed to be the price we needed to pay in order to reduce the deficit and prevent our unsustainable debts from being passed on to our children and grandchildren. However, its achievement in this regard has been modest. In 2009/10, Government borrowing was £157bn. This year, 2013/14, the OBR predicts that the budget deficit will be £111bn. That’s a reduction of just 30%. And £111bn is still a very big number. What doesn’t seem to be widely understood is that most of the heavy lift of this reduction has come from the Coalition's decision, when it first came to power, to cut government capital spending by half. This is spending on schools, hospitals, roads, libraries, leisure centres and social housing. (In the case of the subsidy it gave to building social housing the cut was 60%). So in order to protect future generations from the burden of our debts, we are bequeathing to them a legacy of inadequate and decaying public infrastructure, buildings and housing stock that they will have to put right via higher taxes and debt.
Maybe we can afford to be a bit more sanguine about the future now that growth is returning. Let’s hope so. Yet the return of economic growth should not be a cause for celebration, although it does come as something of a relief. The witness of history does seem to be that the normal state of affairs is for economies to grow. And our economy has been helped along by the massive fiscal stimulus that is Help to Buy, a measure that the Coalition were panicked into in 2013, when 3 years of their austerity policy seemed to have achieved nothing but economic stagnation. You would think that it would be reasonable to expect that a commitment to provide £130bn of tax payer guarantees for sub-prime mortgages would generate something in the way of growth. Whether this will prove sustainable is another question entirely. News from the National Audit Office that many beneficiaries of the scheme have managed to buy homes by putting down deposits that are even less than the tiny 5% required, can hardly be reassuring.
So, can we feel confident about the future when we hear the Chancellor’s upbeat, self-congratulatory message next week? If the UK is an island geographically, it certainly isn’t economically. In 2012, George Osborne blamed problems in the Eurozone for blowing the UK economy off course. Arguably the world economy is weaker and more fragile than it was then. Europe is possibly heading towards serious deflation, as the Japanese economy experienced from the 1990s onwards. The economic data from the US appears to be softening. China is struggling to maintain growth at 7.5% and is contemplating more fiscal stimulus, despite being already heavily indebted. Other emerging markets appear very weak, being also heavily indebted and overly reliant on the cheap finance provided by US quantitative easing that has sped off around the world searching for a high return. The Japanese economy is still struggling to achieve escape velocity from its two decades of malaise. Cheap money is blamed for asset price bubbles in equity markets and house prices not just in London, but in places like Australia, Denmark, Norway, France and Germany.
Will the UK economy be able to get back to 'business as usual' in these circumstances?
Last month it was reported that the investor George Soros, who was one of those widely credited with predicting the economic crisis in 2008, had placed a $1.3bn bet that US equities would fall. Yesterday, the FT reported that Seth Klarman, one of the world's most respected investors, was concerned about ‘nosebleed valuations’ in technology stocks and ‘bubbles inflating’ in other parts of the economy. He talked about ‘When markets reverse’, not if. They are not the only ones who think things are going to get worse before they get better. Personally, I think it is at least an evens bet that we will be hearing calls for concerted international action to ward off the consequences of the next stage of the economic crisis that began in 2008, before the General Election next year.
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