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
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    Comment number 76.

    Export led recovery is best way for uk. Its the way Britain made itself great in the first place. Its something we do (did) well, assisted by the world's use of english. The secret is to export that which others cannot make. Such items usually carry a high price tag, but there is always a demand for quality - its just not an easy sell - it requires effort.

  • rate this
    0

    Comment number 75.

    Anyone looking to the duplicitous Vince Cable for answers doesn't know his arse from his elbow

    (To moderator - arse is Anglo-Saxon allowable)

  • rate this
    0

    Comment number 74.

    Britain & most of EU, suffer from same sickness called AUSTERITY. It seems to me that most average-intelligence individuals would realize that you cannot have production or recovery by utilizing cutthroat austerity. First plan should have been FORENSIC AUDIT: What is this debt, where did it come from, is it legal?
    Whose fantasy Island was this in the beginning?

  • rate this
    0

    Comment number 73.

    Beecroft Report was written by Adrian Beecroft, VENTURE CAPITALIST. Beecroft’s proposed solution was: “Compensated no fault dismissal”. Under CNFD, as long as no discrimination is involved, employers could dismiss employees ANY TIME WITHOUT GIVING A REASON. Beecroft's plan would've created beehive of claims after 5 April 2012, so more bureaucrats would be required.
    Plan? What plan?

  • rate this
    0

    Comment number 72.

    I know that I am probably one of your biggest conspiracy "nuts", but I believe something more sinister has been afoot; this arose from covert actions of the huge investment banks introduced such nefarious WMDs as derivatives, CDOs & other useless paper into the financial markets. How can banks lend when they are too busy covering up toxic debt with new fresh debt while they write-off toxicity?

  • rate this
    0

    Comment number 71.

    Off@69
    Recognising Conflict of Interest
    Only in "governments"?

    Throughout society, 'self-interest' explains "catastrophes": engineered 'corruption' of all, all to fear The News, 'watch backs', 'jockey for position', rather than allow value to speak for itself, free to be to move

    tonie@70, "even in Australia", the rich feel 'entitled' to get richer, unaware of 'institutionalised corruption' cost

  • rate this
    0

    Comment number 70.

    UK has to structurally change investing in education , technology and the government to assist in growth strategies. In a globally competitive world to have a strong economy you require to be productive , UK is still in an entitlement mindset that must change if it wants to compete. Its not only UK everywhere is struggling even here in Australia things are getting far tougher !

  • rate this
    0

    Comment number 69.

    The long term remains my concern not the short term ups/downs.
    What a future we are leaving our children!
    Spiralling debt; expensive education; uncertain jobs and all because we put our future in the hands of successive govts who frankly are more interested in themselves than their country.
    Mistakes have been made by govts for decades and this is just the culmination of these catastrophes!

  • rate this
    +1

    Comment number 68.

    Paul,
    Relying on an export led recovery is doomed to failure, because every other nation on earth is trying to do the same thing.

    Instead we should follow China's example of a soft landing, but in reverse: allowing exports to increase naturally through devaluation, whilst supporting consumption untill the transition is complete.

  • rate this
    +2

    Comment number 67.

    Re 56 If Osborne's answer is that the inherited mess is inescapable then he should never have tried. If cutting the deficit is the essential priority why did he set a target of 4 years, not 3 or even 2? Truth is, there is such a thing as cuttting too fast as George is ably demonstrating. Of the two ways to lose an AAA rating, cuts + zero growth is by far the more painful. Plan B is overdue.

  • rate this
    0

    Comment number 66.

    Apart from Inequality & Corruption, Inefficiency and War, until 2010 some thought we had "nothing to fear except fear itself"

    Found out by bad luck, 'taking their chance' at just the wrong time, we have two more fears to bear in mind

    Pseudo-democratic pre-election panic-mongering

    Pseudo-democratic post-election panic

    Contagions

  • rate this
    0

    Comment number 65.

    Growth, increase GDP. How?
    More consumer spending? No good, they've no money.
    More private investment? No good, too risky.
    More government spending? No good, tax receipts too low.
    Decrease imports? Can't, QE devalued £
    Increase Exports? Go for it. Bring back Wilson's SET and we'll all be at it.

  • rate this
    0

    Comment number 64.

    Yeah - could Paul Mason's comments not be distilled and squeezed into a couple of paragraphs? Who can really get across all this prose? At school we called it a précis.

  • rate this
    -1

    Comment number 63.

    It's pathetic that Labour are attempting to blame the PM for this dip. Considering it was a combination of bankers failures, an international economic slump - the main reason we cannot stimulate growth - and Labour's money throwing policies that are causing and sustaining the slump. Maybe labour should actually work in the interest of the people and not blame & slander the PM for everything.

  • rate this
    0

    Comment number 62.

    It is not ALL that bad!

    If you are wealthy you are okay: tax cuts, obscene salaries, massive bonuses, homes abroad to go to if things get really bad here.

    Well, of course, if you are Weak, ill, Disabled, Elderly (a WiDE group) then it is a different story: higher taxes, low pay, no bonuses, nowhere to escape to ... plus: decline in public services. But then most WiDE are not Tory 'chums'.

  • rate this
    0

    Comment number 61.

    Why are government after government, Tory and Labour, continue to show such lavish and ready generosity to large corporations and those who can afford to base themselves in tax havens? I am very puzzled.

  • rate this
    +2

    Comment number 60.

    # 26

    Paul is both brave and correct when highlighting Germany's naked self interest.

    What has been pArticularly nasty about Germany's stance in all of this is their policy of pretending 'kind' eu centric Germany keeps bailing out the poor south, the reality is keeping the south poor AND in the euro keeps Germany rich via cheap exports that are only cheap because it is the euro and not the dmark.

  • rate this
    0

    Comment number 59.

    7. muggwhump
    "Also why is there this odd cross party ideological block on...." (Anything useful)
    ~
    The answer to that is simple, we the British public may not have ANYTHING unless Maggy's mates, Tony's cronies or Cameron's cabal are making on the deal. And even when it's handed to them on a plate, they are so incompetent that we all wind up worse off.
    Lap it up, you voted it.

  • rate this
    -1

    Comment number 58.

    It is time to stop wasting money by throwing it at the civil service and other unelected burocrates. Growth can only be generated in the private sector, and not in the public which is governed by so many poeple who are unwilling to make decisions

  • rate this
    +2

    Comment number 57.

    The depth of this problem needs to be addressed by the taxing of the banking industry still. The government should have put a caveat in the clause when they rescued these banks and made them pay back all profits to the government first and suspended all bonus's paid out. It is the rest of us who suffer at the hands of quite a few power hungry egotistical people with unscrupulous principles!

 

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