Our economic future
The current economic situation is serious.
GDP growth for 2011 has come in at 0.9%.
For 2012, predictions for economic growth range from 1.2% (CBI) to 0.5% (OECD), with the Office for Budgetary Responsibility (OBR) predicting 0.7% as its mid-point forecast.
This is very weak indeed, and indicates that the economy is more fragile than most commentators realised.
Unemployment, as a consequence, is predicted to rise for the next couple of years, reaching perhaps 2.9 million (9.1%) as estimated by the OECD (NB: ILO measure, not claimant count).
Job losses in the public sector have not been more than compensated by a rapid expansion in private sector employment, as predicted by the OBR a year or more ago, and it is not surprising why this has not occurred – employers base investment and hiring decisions upon expectations of the future, and with weak current trading conditions, external factors (i.e. Eurozone crisis), falling consumer expenditure and a continued reluctance for financial institutions to provide inexpensive loans for expansion purposes, these expectations are unlikely to improve in the near future unless something changes.
To put it into context, the NIESR has composed the following graph, to show how the current recession and recovery period compares with previous recessions. What is apparent is that, whilst the 2008 ‘credit crunch’ recession was not as deep as the ‘Great Depression’, the UK is in danger of suffering a far slower, more sluggish recovery, which will be potentially more damaging in the medium term.
(Source: NIESR, http://www.niesr.ac.uk/)
What can be done?
If uncertainty about the future is damaging the real economy, then it is the duty of governments and other policy makers to step in any try to solve these issues.
On the financial sector, questions about the insolvency or bad debt exposure of individual institutions is damaging the sector, and has the potential to trigger another credit crunch. Institutions should be forced to engage in more transparent book keeping, by putting everything on the balance sheet (not hidden in offshore operations), own up to residual bad debt exposure within their operations and, where necessary request recapitalisation, with shareholders taking a haircut (to deal with issues of moral hazard). Quantative Easing (QE) has provided banks with a lot of inexpensive liquidity, but if this is not being used effectively, there is nothing to prevent government from extending credit easing, or, indeed, setting up an alternative system of development (or regional) banks, such as occur in other nations, with an explicit agenda to stimulate economic development in the (regional) economy. If banks can’t or won’t lend to facilitate growth, then government should do so.
On the government’s fiscal stance, gaining the credibility of the financial markets is important, but only if this delivers more benefit to the real economy than a more stimulative approach might bring. There is merit in having a short term stimulus to get the economy moving. It is questionable whether much more can be achieved through QE alone, and so it is time to consider a short term boost through fiscal policy. A targeted approach would be more likely to deliver ‘more bangs per buck’, and so, rather than a cut in the top rate of tax or temporary reduction in VAT, government might want to consider:
– Funding of engagement with small and medium sized businesses to pass on ideas about best practice
– Facilitating clustering of business activity through provision of supportive infrastructure and business advice
– Providing temporary support for key industries (i.e. social house provision, environmental energy)
– Tackling late settlement of accounts – typically by large companies delaying payment to smaller suppliers, and thereby causing cashflow issues
– Labour market policy – improving skills training for the unemployed, better job matching for all sectors of the economy (including ensuring all jobs have to be advertised through job centres), provision of relocation loans to facilitate moving to find work, subsidised employment for a short period (with safeguards to ensure that this is not a deadweight cost, substituting for existing workers)
– Provision of more higher education places – this could be a temporary measure, designed to improve skills
– Funding of independent research studies examining innovative ways of delivering social benefits which may save money – i.e. whether, for example, free childcare would in fact make savings for the national budget, as has been recently reported, or not
Ultimately, however, economic activity in an economy depends upon the demand for things and people within that economy, and if aggregate demand is too low, government needs to step in to make up the shortfall – then it can step back and, as the economy grows, gradually pay of the debt incurred and take measures to rebalance the economy for the long term. That would be a credible economic policy indeed.
Professor Philip B. Whyman
Director, Lancashire Institute for Economic and Business Research, Lancashire Business School, University of Central Lancashire, Preston