The Bank of England is expected to announce on Thursday measures to stimulate the UK economy following signs that there will be a significant economic downturn following the vote for Brexit. The Bank may cut interest rates, inject another dose of quantitative easing or conjure up something new to give the economy a monetary boost.
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The contest for the next leader of the Labour Party is in danger of becoming interesting. Jeremy Corbyn is increasingly stealing the show – perhaps because he is the only one saying anything of substance. The other candidates seem to have been rendered incoherent or inchoate by the carefully manufactured “Big Lie” that the Great Recession was caused by a Labour government that spent too much.
It has now got ridiculous: with Andy Burnham, while arguing for “balanced and sustainable public finances”, considering it necessary to reassure us that “Labour spending on education and the health service didn’t cause the global banking crisis”. As if any of the electorate believe that buying books for British school children and drugs for the NHS caused the sub-prime crisis in the US housing market? And, while senior Labour politicians are busily apologising for spending too much in the past, the Oxford economist, Simon Wren-Lewis, has shown that the argument that the last Labour government seriously mismanaged the nation’s finances is a myth.
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George Osborne is preparing to deliver the first Tory budget since 1996. He will proclaim the success of the government’s “long-term economic plan” and will use this as a platform to launch a radical reduction of welfare expenditure. But repeatedly extolling the success of your long-term economic plan does not mean that you have one. And an economy that in the first quarter was growing at a sluggish annual rate of 2.2% per head – after a deep and protracted recession – is not an indicator of sustained economic revival.
There are two main components of the government’s economic plan. First, to decrease the budget deficit and eventually move it to surplus – with the fiscal burden being borne by cuts in government spending. Second, to reduce the size of the state in the British economy. This is not an “economic plan”, it is a political agenda based on a doctrine of faith.
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When discussing the state of the economy, politicians deploy two key tricks. First, get your excuses in early. Second, take all the credit for any good news but blame others for any bad news.
David Cameron has used both devices when he warns that “red warning lights are flashing on the dashboard of the global economy” with the UK’s fragile recovery threatened by external forces, most notably: the euro-zone crisis; a slowdown of growth in the emerging markets; and geopolitical tensions. So, is the prime minister’s intervention good economics or just good politics?
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The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behaviour and religion.
These are the words of John Maynard Keynes in the first annual report of the Arts Council in 1946. Keynes was writing a lifetime ago, and he was wrong. The “economic problem” of today is firmly in the driving seat of policy with higher economic growth the ultimate goal of many policymakers. But is growth of the economy – producing more goods and services (usually measured as the percentage change of GDP) – a good indicator of well-being or the quality of life? The economist, Simon Kuznets, who developed the concept of GDP in 1934, was sceptical, remarking that: “the welfare of a nation can scarcely be inferred from a measurement of national income.
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George Osborne performed his main role at conference: to produce some good news to deflect attention from defection and deviance. Abolishing death taxes while targeting tax avoiders sounds good and the Tory faithful loved it. And this is good news on the cheap.
The Treasury estimates that the move will cost £150m in a total government budget which is estimated to be £732 billion in 2014-15. It does not cost much because it will only benefit a small number of prosperous pensioners. And the conference also loved the freeze on working-age benefits; which means a cut in real terms for the unemployed and those on low incomes.
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Immigration has risen to the top of the political agenda in the UK.
And the popular press has been propelling the bandwagon. ‘We must stop the immigrant invasion’ according to the Daily Express and ‘enough is enough’ according to the Daily Mail. The Sun columnist, Jane Moore has argued that ‘immigration fears are all about the numbers, not race’. But the numbers show that the fears are unfounded and that immigration is good for growth.
What is the extent of the ‘invasion’? According to the latest official data (see Chart), net immigration was approximately 212,000 in the 2013. And why are they invading? To seek asylum according to public perceptions (see: Blinder, Political Studies, 2013). The reality is of course different. The main reasons for the ‘invasion’ are to study and to work. And these migrants have a positive effect on the British economy.
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The days leading up the budget are hectic as many in the Treasury are busy devising financial gimmicks to please the electorate. This forthcoming budget is particularly important as next year’s budget will be too close to the election to have much of an impact on the economy or the “feel-good factor”. Government politicians are also busy revelling in good economic data including a return to economic growth and falling unemployment. The chancellor has been telling colleagues that “we have won”. Have they?
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Some semblance of calm has descended over Washington after the farce of the government shutdown. But it would be a stretch to say that things have returned to normal and the full extent of the economic damage will not be known for some time.
Full Bog continues here on The Conversation website.
If the Chancellor George Osborne is to turn his vision of reinvigorating our manufacturing sector, the so called “march of the makers”, he and his government colleagues need to develop a coherent industrial policy. The public policy debates which focus on austerity, withdrawing from Europe, and on limiting immigration misses the target. These are short term political agendas, that are not good for long term economic growth. We need Europe as a market for our goods and services, 50 per cent of our trade is with our European partners, and we need people coming into the country to boost our talent pool.
The need for an industrial strategy
There are too many piecemeal policies at the moment and there is too much focus on austerity, and reducing the size of public sector deficits and debt. But there is no coherent long term industrial strategy that will successfully rebalance our economy. The need to rebalance our economy is losing momentum when it should be at the centre of the agenda. We have to focus on stopping the “retreat of the makers” before we even get to thinking about the “march of the makers”
The economy is still stagnating. We are still really bouncing along the bottom, this is the worst recession and the worst recovery from recession for over one hundred years. In normal times, an economy recovering from recession should generate annual growth of three to four per cent. The recent quarterly growth of 0.6% is not an indicator of a sustained recovery – particularly as it is unbalanced growth with manufacturing and construction continuing their long term decline.
When in March 2011 George Osborne called for a “march of the makers” he identified manufacturing as the key growth sector for the economy and announced a series of policy initiatives, such as: extending the export credit guarantee schemes; increased R&D tax credits; and the creation of new enterprise zones. But these policies have failed to generate growth because they do not deal with the fundamental problems which are the lack of demand and the lack of investment in the economy.
The myth of the ‘invisible hand’
The manufacturing sector has suffered benign neglect from governments of all persuasions from the 1960s and particularly from the 1980s onwards. The manufacturing sector has been allowed to decline based on the argument that markets know best and that the economy can be built on services. Manufacturing has been left to decline, whereas in the USA and Germany it has been supported. For some, the “invisible hand” of the market, will solve all economic problems – a phrase used only once by Adam Smith in “The Wealth of Nations”. Markets rely on help from government to help them work more efficiently and become more effective – the role of the State is to support markets. If we just rely on ‘market forces’, the result is an unbalanced and weak economy.
The need to rebalance
In the UK, there are sectoral imbalances: we have seen a focus on the financial services and the relative decline of manufacturing. There are regional imbalances: London has done very well over the last thirty years while the North West and the North East have not. There are also trade imbalances: we have had a big balance of payments deficit and we are not paying our way; for the last thirty years we have been borrowing from the rest of the world to fund our consumption habit.
These three imbalances – in our sectors, our regions and our balance of payments – cannot continue and we are destined to see much lower growth for ourselves and our children in the future.
Rebalancing is important, geographically for the regions and also for the economy as a whole. It is not just about manufacturing but it is also about giving our high technology services, our creative industries, a much needed push too.
Openness strengthens the economy
There is also the misplaced focus on reducing immigration. The UK economy has always been open to talent, and that talent has helped our economy grow. We need to be an open economy both to ideas and to people. Europe is one of our major markets if we withdraw from Europe it is going to harm economic growth.
The importance of investment
What we need is a coherent strategy to invest, and although the private sector will help, a lot of that investment will have to come from the public sector and that means increased government expenditure. We must relax the current focus on austerity, and cutting deficits, the main legacy we can leave our children is not the problem of deficits, it is the problem of low economic growth. If we want to get economic growth going we need investment and we need investment now and the public sector has got to be part of that.
An earlier version of this blog appeared on the Compass website.
Michael Kitson: Economist 