This week, we’ve had three pieces of economic news that, on the surface, are extremely welcome.
Is this good news? Yes.
Is it a sign the governments economic strategy is working? Not on your nelly.
The news appears good because it was previously so bad. It like having a bucket of tepid water thrown on your head. It’s only a relief if the last one was freezing cold.
On top of that, the size of the hole we’re in means that even a light dusting of good news doesn’t address our crisis.
This highlights two issues, one economic, one political.
The economic one is that the consequences of the government’s foolish decision to signal a sharp withdrawal of demand from the economy has had the effect of extending the planned period of fiscal austerity well into the next parliament.
This, in itself, isn’t so awful. It’s pretty much what a Labour government would have done.
The difference comes in what we’re spending on. The Tories have basically held down capital and programme spending and restrained growth, then let the magic of capitalism and automatic stabilisers kick in to protect them against the consequences of their own stupidity. We end up with an economy that may be recovering from disaster, but doing so weaker, longer, and with fewer jobs than it could and should have done.
Even this ignores the fact that capital spending is the one area we should have been keeping up, but we’re not. Put it another way, if we were on exactly the same overall fiscal trajectory, but with capital spending and programmes holding up, tax receipts increasing and social security falling, I’d be feeling a lot happier about our economy. We’re not investing to recover, we’re recovering without investing.
This is exactly what we don’t need to be doing, as Martin Wolf argues today.
That the wonder of the social market, where the hard work of thousands of entrepreneurs, the restraint of trade unions and the efforts of millions of workers means that all these mistakes might still lead to a recovery, of sorts, highlights the political problem.
If the bar for economic success is set as low as ‘recovery, on any terms’, then the government might be able to claim credit for a pretty awful economic performance. Duncan Weldon has written very well on this before. One percent GDP growth in 2013 will be an awful outcome. Same for 2014.
More than being an unjustified political scalp for the government, though, this sort of ‘weak recovery’ would be a particularly bad outcome for a progressive party newly entering government in 2015.
You’d be faced with persistently weak tax take and relatively high social spending (costs of failure) due to general weakness in the economy, plus the sense among markets and commentators that since the economy was growing gain, there was little benefit from a fiscal stimulus. If you considered such a path anyway, you might even face the possibility of a real increase in debt costs if other economies are performing well and providing a better bet for lenders. In other words, if we lock in a weak, sustained low growth, high cost of failure trajectory now, it becomes increasing hard to reverse course later. George Osborne took the road less travelled by, and we can’t go back and choose again.
By 2015, it might begin to feel like TINA is back again. The government runs for re-election on a platform of ‘We’ve sorted out the mess (sort of)’. If they still lose, it turns out the options for the next government are really constrained. The cost of debt may be higher than it is now, while the burden of the ‘costs of weak recovery’ means there’s little fiscal space to encourage either state capital spending or private sector investment. Meanwhile, there’s immense pressure on public services after 4-5 years of restraint, especially in terms of capital spend.
Now, all this is very pessimistic. We may get saved by growth elsewhere, or the magic of capitalist innovation or some such other deus ex machina.It might be that when recovery does come, there ends up being a tidal wave of stored up investment as confidence returns.
For all that, the person in British politics I feel most sorry for is the MP, as yet unknown, who walks into Number Eleven Downing Street in May 2015, full of the joys of a spring victory and with great expectations for growth and deficit reduction.
For they will be cleaning up the mess of not one, but two disasters and will be doing so with the political equivalent of an old hanky, a used dishcloth and a leaky bucket.