The challenges for a new growth model
With every day that passes, and every Budget U-turn, the Coalition it seems comes closer to an at least tacit admission that austerity is not the answer to Britain’s economic plight. If this is indeed its thinking, then it is surely right –though the dawning realisation may well have come too late. For this is a crisis of growth not of debt – a crisis, properly understood, that can only be exacerbated, as we have already seen throughout Europe, by deficit reduction and public retrenchment. If the solution to a crisis of debt is austerity, then the solution to a crisis of growth arising from the exhaustion of the old, inherently unstable, growth model is to find another.
But herein lies the problem. For growth models are not easily established, especially in economies whose recent engines of growth (financialisation, asset appreciation and equity release) are as broken as these. Moreover, the value of growth itself, certainly of growth on its own, can also be questioned – it is certainly not the only way to measure the success of an economy. That said, in the short- to medium-term we would probably all gladly settle for growth – since ‘no growth in one country’, as it were is hardly an appealing prospect. The fear must be that we are destined for a combination of environmental unsustainability and non-growth – the worst of all possible worlds.
So, for now at least, the focus must be on growth – if only because the transition to environmental sustainability is much better made from growth than its absence. So what are the impediments to growth with which any new growth model or strategy would have to contend? There are essentially three.
The first relates to monetary policy. The dependence of the old growth model on private debt increased the sensitivity of demand in the economy to interest rate movements and, in the process, the threat to growth posed by inflationary pressures. That problem, though temporarily suspended during the crisis itself and again now (in the double dip), has plagued the economy since 2007, with the Bank of England unable to use interest rates to control inflation.
This is compounded by a second factor – the size of the mortgage and commercial lending rate spreads which opened up during the crisis. Though not much commented on, these have yet to close up again in the way that inter-bank lending rates did. It has, is short, become more costly to borrow at a given Base Rate; or in other words, the monetary authorities have allowed the banks to pass on a significant part of the cost of their recapitalisation to borrowers – suppressing both consumer demand and investment in the process.
A final factor relates to the difficulty of resuscitating the old growth model. The problem here is a long-standing – indeed, an intergenerational – one. Sustained house price inflation at 10% per annum over a number of decades was always going to create a crisis of affordability for new entrants into the housing market at some point. That point has, of course, been brought forward, dramatically, by the crisis – and the intergenerational problem of affordability is now being compounded by a step level increase in the cost of mortgage lending over the Base Rate and the increased levels of personal debt that will follow the withdrawal of state funding for higher education. But it would have come anyway.