Double-dip recession: There's always fantasy island

 
A beach in Zanzibar, Tanzania The sunshine of economic recovery has so far failed to matterialise

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There's a parallel universe I always go back to when we get big GDP figures, as we have with today's announcement that Britain is in a double-dip recession.

In that parallel universe, the British economy recovers rapidly on the back of a shrinking state, booming exports and a rapid switchover to high-tech manufacturing.

Stay with me for a tour of this alternative reality: The economy is now recovering rapidly, at 2.6% per year, following a very decent 2.1% last year. Exports are booming - the positive trade balance contributing a third of the growth, even as government spending and investment slumps. Oh, and CPI inflation is 1.9%.

Every week at PMQs, Ed Balls sits with his head in his hands, ruing the day he ever read a Keynes textbook…

Now, that parallel universe is based on something very real and tangible. It is 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.

Almost every aspect of the OBR's vision has been proved wrong.

Even though manufacturing has recovered fast, it has nowhere near made up for the destruction wrought during 2009-10, so output is below where it was when Lehman went bust.

A trader looks at computer screens The eurozone has been something of a headache for the markets

Meanwhile the world economy, which was recovering faster than expected in 2010, has slowed down, and Britain's key export market, the eurozone, has tanked because of disastrous leadership and the naked pursuit by Germany of its own self interest.

Last November, two years on, the new OBR leadership presented George Osborne with a much bleaker picture: So much damage had been done that rebalancing would not be rapid; growth would not return rapidly. The "output gap" was so large that there would have to be even more austerity even to meet the target George Osborne set himself, and then conveniently moved. Moreover, consumer demand was being flattened by imported inflation, the result of the lower pound engineered by Mervyn King at the Bank of England in numerous Eeyore-like appearances.

At that moment Mr Osborne had a choice. The IMF had left him an open door to respond to any deterioration by cutting taxes. It said that if the economy deteriorated:

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A consistent theme throughout this past 12 months has been the absence of a growth plan that actually delivers growth.”

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"Some combination of the following would need to be considered: (i) expanded asset purchases by the Bank of England and (ii) temporary tax cuts. Such tax cuts are faster to implement and more credibly temporary than expenditure shifts and should be targeted to investment, low-income households, or job creation to increase their multipliers."

Asset purchases - ie expanded money printing by the Bank of England - we have had. Tax cuts we have not. On 29 November last year George Osborne set his face against that kind of Plan B, in favour of a Plan A++, which involved extending the period of cuts for two years and raising the amount clawed out of the economy by austerity from £111bn to £147bn by 2017.

That's why I described it as "a turning point in British history": Osborne rejected one form of conservative response to slowing growth - tax cuts - in favour of a policy mono-focused on balancing the books in five years time.

A consistent theme throughout this past 12 months has been the absence of a growth plan that actually delivers growth. The Conservatives' instinct was to go for a rapid breakup of labour market impediments to growth: mass exemptions for small businesses from minimum wage rules, reducing entitlement to maternity leave etc and unfair dismissal. This was the focus of the Beecroft report. The Lib Dems stymied it, leaving the government, as Vince Cable said in a leaked letter, without a coherent strategy.

"There is still something important missing - a compelling vision of where the country is heading beyond sorting out the fiscal mess; and a clear and confident message about how we will earn our living in future."

The global economic recovery has sparked growth in manufacturing and consumer spending in Lincoln

The government will argue, correctly, that a huge amount of our current woe is the result of the collapse in confidence and in global credit conditions engineered by Mr Sarkozy and Frau Merkel. It will point out - as I have pointed out on Newsnight, in my report from Lincoln last month - that there are pockets of success where industry has oriented itself to high-tech, export-led growth.

The challenge for policy now is what to do about these new conditions. Quantitative Easing is a strategy running out of road. The only "upside" to the persistent high inflation is that it is wiping out the savings of the old, as opposed to the job prospects of the young. But that, as they say, is not the sort of upside you really want when there is a huge demographic bulge of over 55s in the electorate.

You could cut taxes, as demanded by various industry federations, slashing corporation tax or massively increasing capex exemptions: but that would involve accepting the risk that the UK loses its AAA rating (as France and the US have done).

Supporters of tax cuts might argue that we will lose our AAA rating anyway if growth fails to materialize - because even the new, revised and realistic OBR projection has growth at 0.8% this year (it will struggle to meet that) and a combination of consumer spending and a soaraway investment boom from 2013 onwards. This too begins to look like fantasy island.

The fact is, even in this depressed world situation, economies that are export oriented, high-tech and can expand domestic services - including mixed-economy health services - are growing.

The initial premise of George Osborne's austerity programme turned out to be wrong. The real problem is if the premise of his longer, deeper austerity plan is also wrong, and that Vince Cable is right.

What will the government do? It's hard to get them into a TV studio at present but we'll let you know.

 
Paul Mason, Economics editor, Newsnight Article written by Paul Mason Paul Mason Former economics editor, Newsnight

End of an era

After 12 years on Newsnight, Economics editor Paul Mason has moved on to pastures new and this blog is now closed.

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  • rate this
    +2

    Comment number 16.

    It is plain that the problems are too big for markets to"correct". Ergo Govt must act. Globalisation means the structural deficit is not sustainable, so welfare must adjust&probably real wages. Debt growth hid the decline in living standards, competitiveness. We have either to improve the UK infrastructure or make/do things people want at the right price, long term. A plan would be a start.

  • rate this
    +1

    Comment number 15.

    Not that TB/GB shopuld be at all proud

    But Tory 2010 'panic ruse' has turned toxic

    HOW to retreat - back to the Darling-Brown compromise?

    TOO LATE for the Darling-Brown 'lucky curve' -

    Electioneering ruse has DRIVEN down UK, Europe, West,

    From gradual adjustment, to convulsion:

    Status epilepticus, but still in denial.

    Call close for straight-jackets?

    NOW: Equal Rations, pull together, live

  • rate this
    +3

    Comment number 14.

    I agree Paul that QE has failed and has given us inflation rather than growth. My contention has been that we need to reform our banking sector rather than be involved in seemingly endless bailouts and my argument is linked to below. Otherwise we face continued stagflation

    http://www.mindfulmoney.co.uk/wp/shaun-richards/a-plan-for-reforming-the-uk-economy-start-with-the-banks-right-now/

  • rate this
    +6

    Comment number 13.

    OBR, MPC are simply devices for the government to outsource its responsibility for the management of the economy. At the same time the obsession with the deficit is now shown to be self defeating but even if it is obvious that austerity does not work we must try harder so let's have a 5% 'contingency' for government departments' & another £10bn cuts to welfare-same as blood letting for healthcare

  • rate this
    +4

    Comment number 12.

    Both the savings of the old and the job prospects of the young are being wiped out so a double whammy! Perhaps that is the rebalancing of the economy that government talks about.

  • rate this
    +5

    Comment number 11.

    The wrong economic theory applies to all mainstream economics, both monetarist & Keynesian.
    At root they have the wrong conception of value & hence the wrong theories of money.
    They forget to differentiate between commodity money (which can be represented by token money) & credit money.
    Marx understood the difference between prices (exchange-value) & labour values - the two can diverge.

  • rate this
    +2

    Comment number 10.

    Gosh, how annoying it must be to be the chancellor, continue inflating the money supply and be damned by the voters for rising cost of living through inflation. Or, cut taxes and have to make up the shortfalls in government spending by further borrowing against the national debt and risk losing the AAA rating as government debt spirals out of control.
    So much for so called budget responsibility.

  • rate this
    +2

    Comment number 9.

    Greetings from fantasy island.

    We are more concerned about bashing the pommes at the olympics and poaching afew more engineers, teachers and scientists from you to support our future prospects than debating which stroke european politicians are using as they all swim around in the same cess pool.

    You are right, of course, but, who cares..surfs up and 'tatoo' is serving cocktails at 8.

  • rate this
    +6

    Comment number 8.

    Wrong economic policies because of wrong economic theory.
    Not that the Tories are driven by economics directly, they see their ideological opportunity to role back the State.
    But ironically, it's the State that will have to come to the rescue again of finance capital.
    This because the debt (credit money) is so great it can't be paid off.
    The claims on future labour time are too great.

  • rate this
    +2

    Comment number 7.

    Is there an official definition of a double dip recession?
    After all the economy has been 'growing' for several years.
    Maybe the kind of growth we've seen in the past few years is as good as its ever going to get.

    Also why is there this odd cross party ideological block on building social housing at a time when the construction sector is contracting and we have a massive housing shortage?

  • rate this
    0

    Comment number 6.

    Consider this. Assuming a net global 2% increase in energy use corresponding to a 2% global economic growth rate, then all the available reserves of conventional oil, natural gas, coal and uranium will be used up by 2060. What will we do then?

    Economists fail to understand the nature of the exponential function, the first law of thermodynamics and the finite nature of our world.

  • rate this
    +8

    Comment number 5.

    On the wider point, most of the reading i have done shows that parts of the UK economy are well integrated into international economy. So it must be something else that is holding it back.

    Government policy is for finance, and who cares about outside of the southeast. Firms produce things and need infrastructure, trained workforce etc.

    Tax cuts will please finance but do little for wider needs.

  • rate this
    +4

    Comment number 4.

    PAUL,
    Can we now keep the money we were going to give to the IMF to help out Countries whose Economies are in Trouble? :(

  • rate this
    +12

    Comment number 3.

    It's about time that the PM and Chancelor had a meeting with "Micro" business leaders, rather than the captains of industry. It's we very small businesses that can expand rapidly, export and take on more of the unemployed.

    We also have the Tee shirt when it comes to reducing waste and getting things moving.

    Here is your first volunteer Mr Cameron, but I won't be holding my breath.

  • rate this
    -1

    Comment number 2.

    Recession, well lets look on positive side

    Hollywood are making a new film in the UK called

    "Nightmare on Downing street"

  • rate this
    -2

    Comment number 1.

    The Coalition misunderstood the depth of the problem in the first place. You could see the twinkle in their eye as they thought they just needed to repeat Ken Clarke's wheezes of 20 years gone and hey presto!

    It was never going to happen like that and it hasn't.

    The vision has to be through technology, innovation and manufacture. The UK is not ready for the world of work quite yet..

 

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