Two years on – time for the Government to think again
But important as the severity of the double-dip is, the wider issue is the longer term stagnation of the UK economy. Today’s figures make clear that we have essentially no growth in the past 18 months.
It’s against this background that today’s FT features a whole range of ideas to boost growth – from boosting infrastructure spending (favoured by NIESR’s Jonathan Portes) to the a ‘balanced budget expansion’ (as argued for by the SMF’s Ian Mulheirn) to more inventive and expansionary monetary policy (the preferred Plan B of the IMF).
Nick Clegg yesterday signalled that he supports a ‘massive’ expansion of investment. Something the TUC would certainly support but until we get concrete details, it’s hard to get too excited by this intervention – especially as Clegg has made similar calls in the past (for example last September) which haven’t materialised.
The FT’s Chris Giles has written an interesting op-ed piece today, on the state of the economy and the policy debate and whilst I don’t agree with his conclusions, I’d recommend a read.
What really comes across from this article is the high degree of uncertainty about what has driven the UK’s poor economic performance over the past 18 months – was it the Eurozone crisis? A tightening of credit conditions? Austerity? A commodity price shock that increased inflation?
He writes that:
Deficit reduction plans might be hitting the economy harder than I and the UK authorities imagined. But the euro crisis and tighter credit conditions have also hit growth prospects.
The TUC has long argued that the government was under-estimating the impact that austerity would have on the wider economy. Of course events across the Channel have had an impact, the rise in the oil price pushed up inflation and a refusal by banks to expand credit (especially to SMEs) is holding back growth. But none of this means austerity has not had a major impact as well. Indeed I’d argue that when other factors are providing such a headwind to growth, the case for the government to be doing more to support growth is stronger not weaker.
But to be honest, all of this debate about led to the sharp slowdown in 2011 and the double-dip in recent quarters is ,to an extent, irrelevant.
I might think that austerity was a major factor and other might disagree, but what matter is what happens now. We can debate what is to blame for what happened in the past 18 months till we’re blue in the face, but it’d be more productive to spend time trying to reverse stagnation.
What is indisputable is that the initial projections from the OBR in June 2010 (for whatever reason) have turned out to be incredibly optimistic. The chart below compares what has actually happened to GDP since Q3 2010, the path then expected by the OBR (slight caveat the OBR in June 2010 only provided quarterly forecasts until the end of 2011, for Q1 2012 I’ve simply pro-rataed their full year 2012 forecast):
GDP has grown by 4.1% less than the OBR expected during this period – a huge miss. And yet fiscal policy has remained essentially unchanged (austerity has been extended by two years but the pre-planned tax rises and spending cuts for the period 2010-2015 remain).
Whether the cause of lower growth was austerity (and I think it was a major factor) or not, the simple fact is that the government’s fiscal plans are based on growth forecasts that have proven to be highly optimistic.
Given the evidence that the economy is not as strong as they hoped, they should think again. To continue with a plan deivised almost two years ago, even as the economy underperforms and stagnates isn’t building credibility, it’s simply reckless.