Wednesday, 29 January 2014

A recovery not made in Downing Street


The best economic figures for seven years are a cause for celebration, but also a moment to take stock. The numbers are good, actually - and about to get better. Last year the United Kingdom's economy grew by nearly two per cent, and next year that figure might hit three per cent.

So has the Chancellor, George Osborne (above) been vindicated? We say 'no'. If you look hard into the data, Britain's renewed growth looks familiar indeed from every other recovery we've ever had since the Second World War. More debt. Higher house prices in the South East of England. A chronic labour productivity problem that just won't go away - which is fluffing up those unemployment numbers no end as employers feel obliged to take on more and more workers, but not really helping the UK pull away in terms of relative economic performance.

Now we shouldn't get too carried away by all this criticism. Every economic historian will tell you that all developed economies start to recover via a domestic shopping spree. Ask yourself this: are businesses more likely to invest and grow after demand has started to reappear, or preempt it and risk losing out? The answer's pretty self-explanatory, isn't it? And regular readers of 'Public Policy and the Past' know that Mr Osborne always planned for private and household debt to rise and take up the slack that all his precipitate early cuts to public spending left, even though it was always the state - and not individuals - which was in a good position to borrow more.

But this recovery has got even commentators usually friendly to the Chancellor really worried. They don't use phrases like 'unbalanced and unsustainable' without good merit. Nor does Vince Cable, the Business Secretary, air his own concerns without good reason. Low productivity, rising asset prices and worries about inflation just a few months into a recovery? It's a great big red light that tells you that parts of the UK's grotesquely segmented economy are going to start overheating pretty soon. Overstretched households, many millions of whom are now very vulnerable to any rise in interest rates, will feel the pain.

And remember how we were supposed to get here. Government spending was going to reach structural balance by the end of this parliament - and state debt was going to be falling. There was going to be a 'march of the makers', with manufacturing powering our exports. Productivity was going to rise to fill all the gaps. Britain's triple-A debt rating would be preserved. Did any of it happen? Er, no - something Mr Osborne should remember when he berates the political opponents whose macroeconomic views he basically accepted in 2011-12 by turning the public spending taps back to half-on.

Will all of this matter politically? Probably not. The present Coalition will probably now get the benefit of the electoral doubt in 2015: certainly its prospects look better now than for a couple of years. If growth continues to surge ahead, and stagnant real incomes start to catch up, Mr Cameron and Mr Osborne will get to serve a decade in their respective jobs.

But when and if that happens, it will have been a matter of luck and cynical opportunism, not economic judgement or planning. The only consolation is this: like Harold Macmillan in 1961-63 and Margaret Thatcher in 1988-90, they'll be left to face the consequences of their own overheated mess.

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