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?