Wednesday, 25 April 2012

The UK is back in recession; it is time to change course

That is one grim-looking chart. The UK is back in recession. It is almost five years after the collapse of Northern Rock - the event that heralded the crisis - and the UK output is nowhere near its pre-crisis peak. We are half way through a lost decade of growth.

After five years of abject failure, it is time to reappraise policies and change course. The first priority must be the normalization of monetary policy. The Bank of England must raise rates to a the point where they are higher than the inflation rate. That would imply that rates should be at least four percent.  This would, more than anything else, reflect a commitment to exit the crisis and return to some degree of normalcy. It would have a profound effect on expectations.  In contrast, we gain nothing by keeping rates close to zero.

Then, we need to turn to public expenditure. The government needs to be downsized. We must restore confidence in public finances. The coalition have made a start in this direction, but their plans are too timid and the consolidation isn't fast enough. Moreover, we should forget about raising taxes, which will only serve to discourage growth and investment.

The kind of expenditure reductions needed to balance the government accounts are huge.  Therefore, we will need to fundamentally rethink the role of the state.  All options should be on the table; privatizing the NHS, school vouchers, introducing motorway tolls, ending rail subsidies, abolishing housing benefits, and cutting off fiscal support to Scotland.

Third, we need serious welfare reform. We need to provide proper incentives for work. It is madness to have a one in four of our young people unemployed while at the same time importing hundreds of thousands of hard working migrants to do jobs our young people won't do.

Finally, we have to clean up the banks. They need to honestly admit to losses, stop paying unmerited six digit salaries and recapitalize their balance sheets through retaining profits rather than distributing dividends and bonuses.

Without a change in policies, UK output will continue to flat-line.  Do we want another five years of near zero growth?


droog said...

What formula for calculating GDP are you working from? The one I know doesn't lead to growth if we follow your prescription; at least not inevitably. I'd say the chances of it leading to growth are less than 50%.

-Public spending: Boldly reduced based on your proposals so GDP starts to go down.

-Domestic consumption: ??? High unemployment, reduced public participation in the economy, dwindling manufacturing sector. We've been on this trend for the past three years. Do we honestly believe consumption will rise if Germany buys the NHS and takes the profits out of the UK? I guess we'll agree to disagree on this one.

-Trade surplus: Good luck seeing this one improve in the near future or as a result of selling off public assets.

-Investment: We already know banks aren't investing in anything other than their global derivative money-go-round. I agree a change in interest rates may improve this item but it isn't a given that it will be a net increase in GDP.

I don't see how two more years of austerity will boost consumption, investment and/or trade surplus. It is possible but unlikely. We are seeing the results right now. George Osborne caused this double dip. Your proposals boost the UK's short term ability to borrow but how do they grow GDP?

In truth if you cut down public spending on welfare you need to dump the savings onto investment hoping that the investments are wise and you see a rise in trade and consumption. Once those other areas pick up the slack you can then reduce the size of government.

Let's not pretend Keynes was wrong and Osborne is right.

Stevie b. said...

Alice - great post! George Osborne had better watch it - there's a chancelloress-in-waiting just itching to face up to and do what he seems incapable of doing!

Electro-Kevin said...

Agree with you, Alice. On the railways subsidy too :-(( (Turkey-Christmas ... voting)

We have a toxic combination of socialism and spiv capitalism in the UK:

- the former brought by Labour
- the latter by Tories

What a f*****g mess.

dearieme said...

Given what an appalling mess Blair/Brown left, the state we're currently in is surprisingly good. I expect much worse to come, and I doubt that there's much that can be done about it by a fragile coalition government. Or, at least, I doubt that there's much that will be done about it. Why they didn't explain how awful things were the moment they reached office is beyond me: they desperately needed to establish some popular acceptance of radical measures and they didn't. Chumps!

dearieme said...

P.S. All talk of Keynesian treatment is essentially frivolous since Keynes wouldn't have started from here. His policy didn't include out-of-control government spending during booms, for heaven's sake.

Anonymous said...

Agree with much of this, except Scotland isn't subsidised. It is unionist propaganda.

How much is spent on subsidising landlords through housing benefit?

Droog, the NHS "profit" already goes abroad. With the exception of Glaxo and AstraZeneca, all the other biggest pharma companies are foreign, mostly American.

Anonymous said...

Too late. We're dead.

And GDP is just a stat that supports "Keynsian" (in the modern sense) economiic policies. The more you borrow, the higher the GDP. Old fashioned bankers wouldn't like me borrowing £10Trillion against my suburban semi, but boy, would my GDP be great if I spent £101Trillion of it.

AgainsTTheWall said...

As currently measured GDP includes all borrowing. This element should be stripped out to show the real productive value of the economy. If it were I believe we would see that UK plc has been flat-lining (or maybe declining) since about 1980.

miken said...

We're in recession and there's going to be no housing boom to help get us out of it.

To think we are even recession after 325bn of QE is unbelievable. You could have employed millions of people for many years with that kind money. If all those people had been productive then we would have high levels of growth in my opinion.