08-30-2012, 08:33 PM
Upon taking office, Chancellor of the Exchequer George Osborne set a target to reduce the UK's deficit to the point that, in the financial year 2015–16, the total public debt would be falling as a fraction of GDP, set up the Office of Budget Responsibility, and commissioned a government-wide spending review, to conclude in autumn 2010, to set limits on departmental spending until 2014–15. He outlined £6.2bn in cuts to take effect before the autumn spending review: "We simply cannot afford to increase public debt at the rate of £3bn each week." A Financial Times editorial agreed. In an open letter to the chancellor, however, the respected FT commentator Martin Wolf wrote: "I have been fascinated—if appalled—by the pre-Keynesian approach you and the prime minister have taken to the UK's fiscal challenges.
<span style='font-size: 20pt'>What Keynes called "the Treasury view"—that fiscal policy has no effect on activity, even in a deep recession—is alive and well in Downing Street."</span>
Comparing Coalition austerity measures with the Opposition's, Wolf commented that the "big shift from Labour . . . is the cuts in welfare benefits."
Leaked Treasury documents the next month revealed that Osborne anticipated his tighter spending would lead to 1.3 million jobs lost over the course of the parliament. Osborne has termed those who object to his policy "deficit-deniers".
In September, the IMF described Osborne's deficit reduction plans as "essential", though revised its growth estimate down, and dozens of leading British CEO's publicly declared their support in a high-profile letter. Others were openly hostile to Osborne's plans, notably David Blanchflower and Martin Wolf. It was also reported in September that the quarterly UK trade deficit for April–June 2010 was the largest since annual records began in 1946. "July's dreadful UK trade figures cast further doubt over the ability of the external sector to drive the recovery once the boost from government and consumer spending fades," commented Vicky Redwood of Capital Economics.
George Osborne, presented the Government's Spending Review on 20 October, which fixed spending budgets for each government department up to 2014–15. Before and after becoming chancellor, Osborne had alleged that the UK was on "the verge of bankruptcy". When he maintained the stance to justify the Spending Review, Martin Wolf took issue: "The chancellor presents the hypothesis of looming national 'bankruptcy'.
<span style='font-size: 20pt'>If so, the UK must have been bankrupt for much of the past two centuries."</span>
A fortnight after his Review presentation, the Treasury Select Committee also accused the chancellor of using inflammatory language to justify the large public spending cuts.
More bad news was to follow as it was reported that UK exports had fallen at a record pace in the fourth quarter of 2010, highlighting the fact that Britain had not escaped a plunge in global trade. Vicky Redwood remarked: "Until the UK's export sector starts to perk up, any recovery in the overall economy seems unlikely." The economy also posted a contraction of 0.5 percent for the final quarter of 2010. Hetal Mehta from Dalwa Capitol described the negative growth as "a horrendous figure. An absolute disaster for the economy. . . . It seems that the economy is incredibly vulnerable. And with the fiscal tightening yet to fully bite, we will have to brace ourselves for a bumpy ride." Osborne said that although the figures were disappointing, there was strong performances and growth from sections of the economy less affected by the weather, such as manufacturing.
<span style='font-size: 20pt'>He also declared that the poor figures and bad weather would not affect implementation of his austerity measures and budget deficit reduction, and that he would not be "blown off course".</span>
08-30-2012, 08:34 PM
2011 ushered in better news, with the revised figures for the month of January indicating that the deficit in trade in goods had narrowed compared to December 2010, and by much more than expected. "This is welcome news for the UK economy and signals a further rebalancing of the economy towards export-led manufacturing growth," said Chris Williamson, chief economist at Markit Group.
Osborne's policies caused continuing concern as a series of bad data indicated the deteriorating state of the UK economy. Martin Wolf observed: "The release of the preliminary version of the May 2011 Economic Outlook from the Organisation for Economic Co-operation and Development allows the reader to trace the disappointing path that the UK economy has taken", and NIESR, predicting a growth slump, recommended delaying the spending cuts. On 6 June, fifty-two people, including some of Britain's leading economists, two former Whitehall advisers and two signatories of the previous year's high-profile letter backing the Tories' cuts, publicly warned Osborne that the UK was too fragile to withstand his drastic spending cuts and that he must draw up a plan B. As in January, Osborne dismissed the criticism. Over the following week, the IMF reaffirmed its support for Osborne's cuts, again describing them as "essential", though again revising its growth prediction down, and a number of economists publicly encouraged Osborne not to abandon his deficit-reduction programme. The same week featured a repetition of a threat by Moody's to downgrade the UK's credit rating (a Chinese ratings agency had already downgraded Britain's credit rating because it foresaw years of sluggish growth), contradicting Osborne's claim a few weeks prior that the UK's credit rating had "come off negative outlook *when other countries are facing downgrades. We have brought much-needed stability at home and attracted near universal confidence abroad".
The trade deficit held steady in April and May: "Month-to-month volatility aside, there has been an improvement in the foreign trade data in the last few months," said Alan Clarke, UK economist at Scotia Bank. Economists noted, however, that although export volumes appeared steady, much of the improvement in the trade balance came from weak domestic demand for imports, a sign of belt-tightening. Interviewing former US Treasury secretary, Lawrence Summers, in April, Martin Wolf asked about Osborne's commitment to austerity: "What the Europeans are doing, their insistence on stringency everywhere—both voluntary in the UK, forced elsewhere—
<span style='font-size: 20pt'>do you consider this to be basically nuts?" Summers answered in the affirmative,</span>
saying: "I find the idea of expansionary fiscal contraction, in the context of the world in which we now live, to be every bit as oxymoronic as it sounds. And I think the consequences are likely to be very serious for the countries involved. . . . I'm fairly confident that this <span style='font-size: 20pt'>experiment</span>is not going to work out well." Martin Wolf agreed "completely" with Summers' assessment. Roberto Perotti of Bocconi University has also shown that on occasions when austerity and expansion coincide, the coincidence is almost always attributable to rising exports associated with currency depreciation. An April 2012 review by UC Berkeley economist Christina Romer confirmed: "The first lesson is that fiscal policy actions have significant and quantitatively important effects on output and employment in the near term. And, these effects are in the standard direction—fiscal expansions are expansionary, and fiscal contractions are contractionary. This lesson comes in part from research done as a result of the crisis, and in part from a serendipitous resurgence of interest in fiscal policy shortly before the downturn."
In June it was reported that Osborne's staff had been complaining privately to the BBC about an alleged negative bias in the latter's coverage of the economy, and Osborne aired the accusation publicly in a BBC interview. The BBC rebutted Osborne's comments on its website.
[In] January, Gavin Kelly, chief executive of the Resolution Foundation think tank and a former aide to Gordon Brown, pointed out that "Britain is in the midst of the biggest squeeze on living standards since the 1970s". Mervyn King, the coalition-friendly governor of the Bank of England, went further. "In 2011, real wages are likely to be no higher than they were in 2005," he said in a speech on 25 January. "One has to go back to the 1920s to find a time when real wages fell over a period of six years." Are you paying attention, Lord Young of Graffham? Young is the Tory peer and former enterprise adviser to David Cameron who told the Telegraph last November that the majority of Britons had "never had it so good ever since this recession—this so-called recession—started".
“”—Mehdi Hasan, March 2011
Second-quarter GDP-figures were, with just 0.2% growth, "horribly unimpressive". The Office for National Statistics (ONS) argued the figures were heavily influenced by one-off, suppressing factors, though Lex argued that, "Little weight should be put on" the ONS's claims. Shadow Chancellor Ed Balls accused Osborne of being "breathtakingly complacent", while Malcolm Barr, an economist at JPMorgan, said, "No one can claim that the economy is anything but disappointing". Though the OBR's monthly survey of private sector economists showed progressive downgrades of GDP growth estimates—the July forecast was a 1.3 per cent rate of expansion, down from 1.7 per cent in March—the OBR reported that public finances were on track. Commenting on the low, 0.2% growth of GDP, Osborne, as on previous occasions, stated that, although the economy was carrying some "heavy weights", abandoning his austerity programme "would only risk British jobs and growth." An FT editorial again gave qualified praise for Osborne's performance. In July 2011, IMF researchers published a study of austerity programmes over the past 30 years, concluding that
<span style='font-size: 20pt'>austerity has a negative impact on domestic demand and GDP,</span>
while a Cambridge University study, after analysing the explanations of why there had been "no substantive reduction in Britain's current account deficit" despite the improved trading situation produced by the depreciation of the pound, found that the "widely and influentially held" explanation that the problem was a permanent loss of productive capacity—rather than a lack of demand—is based on "surprisingly weak foundations." It is a crucial finding, as a previous study has highlighted, because if the lack of demand in the British economy is not addressed, its persistence will itself cause a permanent loss of British productive capacity, "a message that may be taken from any number of historic studies of banking crises." "Why? Because if you're a firm that's trying to hang on to their under-employed workers—and still oiling that unused production line—growth next year is simply not the same thing as growth today", explained the BBC's Stephanie Flanders. "By next year you might have had to lay those people off, or shut down that production line for good. The extra capacity will be gone." The feared, predictable and expected decline of productive capacity was duly confirmed by the OBR in November, as it reported that "there is less spare capacity in the economy than at the end of last year". Conveniently for Osborne, as chairman Robert Chote revealed, the OBR had not attempted to confirm that Osborne's failure to address slack demand was to blame. "The risks that I believe we face now are the far more serious ones of sustained low growth turning into a <span style='font-size: 20pt'>self-fulfilling prophecy,</span>and/or inducing a political reaction that could undermine our long-run stability and prosperity . . . [by] lastingly shrink[ing] the economy's productive capacity[.] . . . Those tendencies are already present", Adam Posen had warned more than a year before. One Goldman Sachs analyst noted the official story, that the UK has permanently lost at least 7-8% of national output in this crisis, means that the
<span style='font-size: 20pt'>Osborne's stewardship has done more lasting damage to our economic potential than either World War II or the Great Depression.</span>
Despite this loss, an IFS/Oxford Economics report in February 2012 still judged that "there is currently a significant amount of spare capacity in the UK economy" for Osborne to kill off.
Bad news emerged for the manufacturing sector, which had been "the economy's stellar performer since the UK emerged from recession". Optimism among manufacturers fell for the first time in two years (shortly thereafter it emerged that manufacturing had contracted in July, the first such decline in more than two years, as British manufacturers fired a broadside at ministers' efforts to "rebalance" the economy); Osborne's plan to offer a national insurance holiday to small companies to boost jobs growth in the UK's regions had had only a "minuscule" take-up since it was launched a year ago; the CBI lowered its growth forecast for 2011 again, but emphasised that the economy was still expected to grow; the IMF, pointing to weak growth prospects, cast doubt on Osborne's ability to meet his 2015–6 goal for eliminating the deficit; the head of the OBR stated his belief that the UK would fail to meet its 2011 growth target of 1.7%; leading builders merchants complained that the construction sector's recovery was being held back by Osborne's austerity measures; the IMF estimated that British households would lose £1,500 a year for the next five years as a consequence of the austerity drive, warned that the UK faced a "bumpy and uneven" recovery, and that Osborne should prepare to be flexible; NIESR, in a more outspoken fashion than the IMF, told Osborne that his cuts would lead to the deficit's existence past his 2015–16 target; NIESR's director and former Cameron advisor, Jonathan Portes, ; NIESR and the IMF estimated that the UK's structural unemployment rate would be worse than before the financial crisis; UK car sales continued their uninterrupted fall for each month of Osborne's chancellorship; and, with the Bank of England preparing to slash growth forecasts, Business Secretary Vince Cable warned that the UK was facing the risk of a double-dip recession.
In an article for the Telegraph in August, Osborne claimed: "The alternative of more spending and yet more borrowing is now frankly ludicrous and places those who advocate it on the outer fringes of the international debate." His article was met with a mixture of disbelief and ridicule, for Osborne assigned not less than four winners of the Nobel Prize in Economics to the "ludicrous outer fringe" of economics—namely Paul Krugman, Amartya Sen, Joseph Stiglitz and Christopher Pissarides—along with other prominent economists like Alan Blinder, as well as Nouriel Roubini, Robert Shiller and Robert Reich who were amongst the few to correctly predict the financial crisis. "Embarrassingly for him," wrote Jonathan Portes, "a few days later, [they] were joined by the new managing director of the IMF, Christine Lagarde, who argued in the Financial Times of 16 August that 'there is scope for a slower pace of consolidation combined with policies to support growth'." The next month, Martin Wolf described Osborne's fiscal policy as being "set on <span style='font-size: 20pt'>kamikaze tightening",</span>and noted that "the markets . . . are saying: borrow and spend, please."
In November, the Office for Budgetary Responsibility delivered a "game-changing downgrade of its look for the UK economy. The result is that a further £15bn of annual cuts will be needed to keep the deficit reduction on track." According to a senior economist at the Institute for Public Policy Research, Tony Dolphin, the OBR's downgrade, which accompanied the Chancellor's autumn statement, was but the latest in a series that have "provided unremitting bad news for the chancellor". Dolphin called for measures to slow the pace of the cuts, to increase demand in the economy. UK industrial output fell 0.6% in November; manufacturing output was also down in the month, by 0.2% following a downwardly-revised 1% fall in the previous month, and meant output was 3.1% lower than a year ago—Philip Shaw, UK economist at fund manager Investec argued, "There isn't very much that's performing well in the UK economy."
Speaking to business leaders at the CBI conference in November, David Cameron said that <span style='font-size: 20pt'>reducing the deficit was "line one, clause one and part one" of the Coalition's strategy for business, </span>though his stance was criticised. In December 2011, The Economist, in reviewing monetary and fiscal policy in the Great Depression and the late-2000s financial crisis, remarked: "Whatever relative importance is assigned to monetary and fiscal policy, though, there is little doubt that their simultaneous tightening five years into the Depression led to a vicious relapse.
<span style='font-size: 20pt'>Spurred by his treasury secretary, Henry Morgenthau—who worried in 1935 that "we cannot help but be riding for a fall unless we continue to decrease our deficit each year and the budget is balanced"—Roosevelt urged fiscal restraint on Congress in 1937." </span>It also warned that in spite of the IMF's argument that the Bank of England's monetary policy would alleviate the effects of Osborne's austerity programme, "Britain is now close to recession and unemployment is rising, suggesting limits to what a central bank can do."
It was reported in The Independent in December 2011 that Osborne had been involved in meetings with bankers lobbying to avoid proposals in the Vickers Report that were intended to reduce risks in the banking industry. The talks were alleged to be secret, but were obtained via a Freedom of Information request.
08-30-2012, 08:35 PM
If you're looking for a top gloomy fact to impress your friends, you could do worse than point out that the squeeze in the public finances in 2012–13 is due to be larger than in either of the first two years of the coalition.
“”—Stephanie Flanders, January 2012
David Blanchflower began the year with a review of the incorrect predictions of those economists surveyed by The Financial Times the previous year who had been positive about the prospects for the UK's economic recovery in 2011.
The UK started 2012 with the biggest trade deficit since 1955, Yale economist Robert Shiller remarking that, "judging by the evidence that we have, austerity programs in Europe and elsewhere appear likely to yield disappointing results". In January, UK unemployment rose to another 17-year high of 2.68m, or 8.4 per cent of the workforce, as the private sector struggled to create enough jobs to offset public sector lay-offs. 44% of the increase in unemployment on the quarter was accounted for by youngsters. Employment did rise for the first time in five months, though "this was driven entirely by older folks aged 65 and over. The burden of rising unemployment and declining employment is falling disproportionately on people under age 50." The number of people working part-time because they could not get a full-time job reached a record 1.31m, and economists predicted that unemployment would worsen further amid slow economic growth and public sector job cuts, as surveys showed weak employer confidence, including one from the Federation of Small Businesses showing that smaller companies plan redundancies too. Unemployment rates had climbed into double digits in the North East (12%) and Yorkshire and the Humber (10.0%).
"The only way to resolve unemployment in the short term is to pull out all the stops to get the economy moving and business growing," said Neil Bentley, deputy director-general at the CBI, and the FT noted: "A core problem has been deficient growth, which has persistently fallen short of expectations and kept unemployment well above the levels of most of the 1990s and 2000s. The Bank of England, for example, has revised down its expectations of the future level of UK gross domestic product 16 times running in each of its quarterly forecasts over the past four years." Nouriel Roubini warned of the deleterious effects of austerity on UK growth. and S&P downgrades of France and other Eurozone governments around the same time were on the basis that fiscal austerity was doing more harm than good. After two and half years of "recovery", the UK economy had recovered only 45% of the output lost during the recession.
Fact one: in the fourth quarter of 2011, UK gross domestic product was 3.8 per cent lower than at the pre-crisis peak in the first quarter of 2008. Fact two: the economy is now stagnant, with output in the last quarter of 2011 a mere 0.3 per cent above its level in the third quarter of 2010. Fact three: as Jonathan Portes of the National Institute of Economic and Social Research notes, the UK "depression"—the period during which output is below its pre-crisis peak—is now longer than the Great Depression, let alone subsequent recessions. Fact four: it could be many years before this slump ends.
“”—Martin Wolf, February 2012
On 20 January, the heads of eleven of the world's leading economic bodies—Christine Lagarde of the IMF, Robert Zoellick of the World Bank, Pascal Lamy of the WTO, Mark Carney of the FSB, Margaret Chan of the WHO, Angel Gurría of the OECD, Donald Kaberuka of the AfDB, Haruhiko Kuroda of the ADB, Luis Alberto Moreno of the IADB, Josette Sheeran of the WFP, and Juan Somavia of the ILO—called for economic policies that would foster growth, and warned of the dangers of austerity. Britain had "led the way in voluntary deficit reduction", noted the FT, but "it is now enduring a prolonged period of near-stagnation. . . . Growth is expected to remain below 1 per cent in 2012 for the second year running and prospects have dimmed to such an extent that the Conservative-Liberal Democrat coalition government is now planning for seven years of public spending cuts and tax increases to rein in the budget deficit, rather than the five it had intended on coming to office in May 2010." The Ernst & Young ITEM Club described the UK as being in a "state of paralysis" as 25 out of 33 economists in a Bloomberg survey forecast a contraction in the fourth quarter of 2011. Shortly afterwards, the Resolution Foundation estimated that millions of families are unlikely to see their spending power recover to pre-recession levels until 2020. January also saw the UK's national debt surpass £1tn for the first time, though as a proportion of GDP (64.2%), the figure is not within shouting distance of the record. Osborne is now predicted to increase net debt by 61.5% in real terms over this parliament, more than the 59.9 per cent which Labour proposed at the general election, leading even some conservative commentators to remark that he owes Alistair Darling a "generous apology". The IMF's World Economic Outlook revised down projected UK growth for 2012 to 0.6% from a 1.7% projection in September 2011, and emphasised that while tackling debt and deficits was import, such efforts "should ideally occur at a pace that supports adequate growth in output and employment". The NAO reported in February 2012 that central government exceeded their savings targets for the preceding year, though it warned much of the success had come simply through cancelling short-term spending rather than the fruits of efficiency gains from reorganisation and restructuring.
In March, NIESR's director, Jonathan Portes, showed that "this 'depression' . . . is now longer than that experienced during the Great Depression, and is not likely to end any time soon. It also shows how what was initially a reasonably strong, albeit patchy, recovery stalled in the autumn of 2010; since then there has been very little growth." In response, Paul Krugman remarked that his "original critique of austerity is holding up pretty well, if you ask me." When Fitch and Moody's moved the UK onto negative outlook, in part because of concerns about growth, a Treasury spokesperson described the change as "a reminder of why it is essential Britain sticks to its plans to deal with its debts". Such a description was criticised: "When the original fiscal consolidation plan was welcomed by the rating agencies, that was a vote of confidence. . . . But when the same rating agencies realised the damage the plan was doing to growth, that made it even more necessary"—an "obvious inconsistency", noted Jonathan Portes. Osborne later got support from S&P, as the agency cited his dedication to austerity measures as part of the reason for keeping its lookout for the UK as "stable".
In his 2012 budget, Osborne's two most controversial actions were lowering the top rate of income tax and targeting pensioners with what became known as a "granny tax". It was reported several days after the budget presentation that banks were looking at delaying payment of £100bn of bonuses to take advantage of the new, lower 45p tax band; the delay would save bankers about £100m in income tax. Targeting pensioners had come on the back of obfuscating arguments about inequality such as those made by David Willetts in his 2010 book The Pinch: How the Baby Boomers Took Their Children's Future. "Britain's real inequalities are between poor and rich areas, not between generations," said Danny Dorling, professor of human geography at Sheffield University. "You can find parts of Britain that are hundreds of times poorer than others. You can find that kind of gulf within a single city or by comparing the north with the south. It is orders of magnitude greater than the gap between old and young. This is just a distraction." The IFS also took issue with the spin put on the "granny tax", criticising the Chancellor for "dressing up what is clearly a tax increase as merely a simplification"—even the Treasury's own advisers on tax simplification were reportedly "concerned" at the way the Chancellor presented the change. Instead of targeting pensioners, business groups and economists had called for emergency measures to tackle the youth unemployment crisis, such as a cut in national insurance contributions for hiring young staff; Osborne did not so much as mention the subject. He was duly criticised by business leaders who had been expecting a budget to boost growth and to help them curb youth unemployment. Those in favour of the budget included Douglas McWilliams, chief executive of the Centre for Economics and Business Research, who described it as one of the "best ever" budgets for growth, and correspondents for The Economist, who argued that, "given the constraints, George Osborne has come up with a smart, well-judged budget."
In an attempt to make the budget more neutral, Osborne also instituted a new 7% rate of stamp duty on houses worth more than £2m, and a £50,000 cap on tax relief; however, the IFS immediately warned about the estimated cost to the Treasury of lowering the top rate, and predicted that the super-rich would find ways to dodge the extra stamp duty and the cap, as indeed they later did, exploiting loop holes such as rolling leases. The IFS further described it as a "poorly designed and distorting tax", and suggested that the Liberal Democrat proposal for a 'mansion tax' might have been a better option and could have raised "considerably more revenue". As the public sector has been cut, the private sector has been concomitantly hoovering up the public-service contracts that are supposed to fill the gaps, but most of the 20 biggest private companies being awarded such contracts partake in tax evasion via subsidiaries in tax havens. An Early Day Motion was put forward by Caroline Lucas calling for the government to exclude such companies from bidding for public-service contracts.
The Chartered Institute for Personnel and Development highlighted a budget-related OBR estimate that by 2017, as a proportion of the total workforce, Osborne's austerity drive will have taken the size of the state sector to its lowest level since the birth of the welfare state after World War II.
Overall, the budget was sufficiently unpopular that Labour overtook the Tories in polls.
In February, it was shown that during the previous year, 44,000 more jobs were lost in the public sector than were gained in the private sector, and a poll of employers the next month showed that more than 40% had no plans to create jobs over the coming 12 months, while 90% felt Coalition efforts to remove barriers to job creation were having no effect on their businesses. London had lost 50,000 companies overall, since 2010; on a borough-by-borough basis, Newham, where there had been significant government spending, saw the largest number of start-ups. "The 'march of the makers' promised by George Osborne went into reverse" the same month, "as factory production slumped by 1 per cent on the month, according to figures from the Office for National Statistics." Samuel Tombs, an analyst at Capital Economics, said the latest manufacturing figures were "terrible" and threatened hopes for a decent increase in first quarter GDP: "Hopes that manufacturing could help to drive a strong and sustained recovery in the economy are rapidly fading." January had seen expectations for employment in manufacturing decline "precipitously". During the last quarter of 2011 and the first of 2012, signs of distress in manufacturing companies increased by 119%.
In March, the previous quarter's GDP growth of -0.2% was revised downward to -0.3%, though Osborne said the UK would avoid recession in 2012. In a major blow, to the chancellor, however, the highly respected OECD predicted that the UK was back in recession, with negative growth of 0.1% for the first quarter of 2012. The same day, RBS economists, who had been forecasting growth for the first quarter barely a week earlier, also predicted negative growth of 0.1%. The Ernest & Young Item Club predicted "dismal" growth for the first quarter and the rest of 2012. Reflecting on the recession predictions, one Telegraph commentator remarked: "In the entire time since the Chancellor came to No 10 in the spring of 2010, the economy has grown by a total of about 0.6 per cent of GDP. That's less than it grew in the last quarter of Alistair Darling's time in No 11." Stephanie Flanders emphasised the point was not so much that there had been negative growth, but that, levelling out the recent quarterly ups and downs, the UK's recovery was dead in the water, worse even than the recovery from the Great Depression. Updated GDP data from the ONS at the end of February revealed the economy had shrunk overall in real terms since Osborne's emergency budget in July 2010. The recovery is the slowest in more than 100 years, with a return to pre-recession output not predicted until 2014, meaning the economy will have effectively "lost" six economic years.
The General Theory pointed out that the catastrophe facing America and, indeed, the whole Western world, was only the consequences of a lack of sufficient investment on the part of business. And so the remedy was perfectly logical: if business was not able to expand, the government must take up the slack.
“”—Robert Heilbroner, The Worldly Philosophers
Writing in the continuing wake of the failure of Project Merlin, and Osborne's misguided replacement of Merlin with "credit easing", Jeremy Warner emphasised that the problem in the UK economy is a lack of demand. He pointed to "Britain's £750bn corporate cash mountain", a sum of money roughly equal to half the UK's GDP, which signals the problem is not an unmet need for credit, but that businesses, large and small, are choosing to pay down debt rather than invest. The Ernst & Young Item Club warned that, with the Osborne's spending cuts depressing demand, economic recovery will remain stalled until nervous business leaders start spending the mountain. The problem is therefore how to encourage more of the latter, one obvious answer being to stimulate demand through government spending, but Osborne is committed to taking demand away from the economy via austerity. The OBR identified business investment as one of the drivers of growth in its November 2011 forecasts, and a fall in real business investment of 5.6% in the final quarter of 2011 was largely responsible for the GDP drop of 0.2%; Lee Hopley, chief economist at the EEF, the manufacturing industry body, argued that the government should do more to help manufacturers buy equipment, and provide incentives for them to invest in research and development. Oxford economist Simon Wren-Lewis has argued that in countries like the UK, where debt is not a critical problem, "fiscal expansion today, followed by austerity tomorrow, is technically both feasible and probably optimal from a macroeconomic point of view." Robert Reich has quoted Lord Thomas Macaulay, the great 19th-century British historian, on English public debt: "At every stage in the growth of the debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt went on growing, and still bankruptcy and ruin were as remote as ever." Reich explained: "The basic way America has always reduced the debt to GDP ratio is by expanding the economy. As Macaulay noted, that's also the way Britain has done it. GDP growth makes even large debts manageable. When the economy is cooking, more people have jobs and better wages. So they pay more taxes. And they require less unemployment assistance and other social insurance." A review of measures deployed countries in the wake of the financial crisis published by the Reserve Bank of New York in 2012 found that fiscal stimulus had been helping economy recovery.
Comparing the UK's stalled recovery since the third quarter of 2010 with the continuing one of the United States (the US had by the time of his speech recovered to its pre-crisis GDP), Adam Posen spoke of Osborne's austerity programme as a major explanatory factor. Likewise Peter Spencer, chief economic advisor to the Ernest & Young ITEM Club, said: "Business investment has picked up nicely in the US, but UK companies remain extremely risk-averse, which is sapping strength from the economy." In addition to austerity, households and banks are still busy deleveraging. "Royal Bank of Scotland and Lloyds Banking Group have at least another two years of bad debt work-off to go before we see significant credit expansion resume. . . . Just one of these factors acting on its own would be a big enough constraint on growth; when you have all three—government, households and banks—all contracting their balance sheets together, the brake on growth is bound to be severe." The number of people claiming Job Seekers Allowance increased for the seventeenth month in a row in March.
Contrary to claims by the government, the major suppressing factor going in to 2012 was domestic, not the ongoing difficulties in Europe—namely the construction industry. Exports to Europe had held up well, and the slight loss had more than been made up for by increased exports to the rest of the world. According to Ross Walker of RBS, while the UK economy's "underlying position looks more reassuring"—he estimated growth during the first quarter of 2012 across more than 90% of the economy equivalent to 0.5%—an enormous decline in the construction sector is predicted to take the UK back into recession. (The BoE's MPC later questioned the accuracy of the initial ONS reports on which Ross based his assessment). Balfour Beatty, the UK's biggest construction company, had just warned that thousands of UK staff will lose their jobs as a result of the downturn in the building industry. According to PwC, the recession had already claimed 5,215 building firms over the previous two years, with no let-up in sight; SMEs had been hardest hit. Between the final quarter of 2011 and end of the first quarter of 2012, signs of distress in construction businesses were up 94%. One way to lift construction would be to invest in infrastructure, but despite the government's emphasis on it as a driver of recovery, new projects and investment remain scarce. A plan announced in November 2011 to get institutional investors to inject £20bn infrastructure investment was, according to industry, doomed to failure, but the alternative of a UK infrastructure bank has been suggested. The IFS recommended that any fiscal stimulus should include investment spending, yet while Cameron and Osborne have talked about road-building, they are so resolutely but needlessly focused on the UK's debt and deficit that, despite near record-low short- and long-term borrowing costs (as of March 2012, the UK is able to borrow short-term at negative real interest rates), they have mooted a course of private-sector involvement using the previous Labour government's disastrous concept of a private finance initiative (PFI). "It's hard to imagine a worse or more anarchic way of organising a developed nation's roads system", wrote one Tory-supporting economist. "Mr Cameron now proposes yet more financial engineering, promising a field day to the lawyers and financiers but a long term liability to everyone else." Osborne had been critical of PFI before coming to power, and with good reason: "Private finance has always been more expensive than government borrowing, but since the financial crisis the difference between the costs has widened significantly", noted the Treasury Select Committee in 2011.
Warning signs of business insolvency, after the pre-Christmas spending peak subsided, rose by an average of 55% across all sectors during the first quarter of 2012. In April, the IMF raised its growth 2012 forecast for the UK this year from 0.6% to 0.8% (in September 2011 it had been 1.6%); however, the Bank of England did not rule out negative growth for the first two quarters of 2012. The Bank of England's regional agents noted continuing slack demand. Still in April, employment figures showed that, while there had been the first fall in overall unemployment in almost a year, a third of the unemployed had been so for a year or more, that the long-term joblessness total was the worst since 1996, that the number of people being forced to work less than full-time hours jobs had surged by 89,000 between December and January to reach 1.4m (the highest figures since comparable records began in 1992), and that the number unemployed women had hit a 25-year high. The masking effect of surging underemployment on the unemployment figures led John Philpott, economist at the Chartered Institute of Personnel and Development, to observe: "A properly recovering jobs market is not characterised by a growing army of underemployed part-timers and pay rises still falling well short of price inflation." The Centre for Economics and Business Research (CEBR) said unemployment would continue to rise from 2.65m to 3m, and stay there for at least three years.
It's important to understand that what we're seeing isn't a failure of orthodox economics. Standard economics in this case—that is, economics based on what the profession has learned these past three generations, and for that matter on most textbooks—was the Keynesian position. The austerity thing was just invented out of thin air and a few dubious historical examples to serve the prejudices of the elite.
“”—Paul Krugman, April 2012
A few days later, initial first-quarter GDP figures showed -0.2% growth, meaning the UK formally re-entered recession. Cameron said the construction-led contraction was "very, very disappointing" but it would be "absolute folly" to abandon austerity; as usual, Osborne said abandoning austerity would make the situation "even worse". The Guardian observed: "It's interesting that he [Osborne] isn't now stating the eurozone crisis as the pre-eminent reason for the struggling economy. Clearly from what the economists are telling us the figures wouldn't stand that up." Some analysts were critical of the ONS and refused to believe its construction figures. The ONS made clear that Osborne's cuts had contributed to the particularly large fall in construction, and Joe Grice, chief economic adviser to the ONS, insisted the construction data had been carefully checked and re-checked. Judy Lowe, deputy chairman of industry body CITB-ConstructionSkills agreed: "The huge cuts to public spending—25% in public sector housing and 24% in public non-housing and with a further 10% cuts to both anticipated for 2013—have left a hole too big for other sectors to fill". Likewise, Noble Francis, director of the Construction Products Association Economics: "Given the sharp effects of public sector spending cuts over the past 12 months it is unsurprising to see that construction returned to recession in the first quarter with a fall of 3% following the 0.2% fall in Q4. With new orders for construction falling 14% in 2011, the industry is likely to endure further falls near-term." Mike Leonard, director of the Modern Masonry Alliance, said: "We have repeatedly warned that a failure to drive the construction of new homes, RMI and infrastructure would result in a lack of growth and rising unemployment." Both Lowe and Francis pointed to economic analysis showing that for every £1 spent in construction returns £2.84 to the economy. A slump in materials sales confirmed the double dip, and a construction analyst said that lack of demand was becoming "critical". Vicky Redwood of Capital Economics said she "remain[ed] comfortable with our view that GDP will contract by about 0.5% this year." <span style='font-size: 20pt'>Recalling "the original projection of the Office for Budget Responsibility in November 2010, which George Osborne used to justify the biggest fiscal austerity programme Britain has seen in 60 years", the BBC's economics editor, Paul Mason, observed that "[a]lmost every aspect of . . . [it] has been proved wrong." The UK's worsening economic situation will make it harder for Osborne to meet his deficit reduction targets.</span>
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