THE UK economy is on the tipping point of no return, and only a united effort will reverse our fortunes, writes Bill Jamieson.
So: are we all shovel-ready? Or faced with a hole like this, should we really carry on digging?
In all the micro-detail of the Autumn Statement, let’s not lose sight of the big picture. Never in the modern era has a chancellor laid before parliament a trajectory that sees government debt heading to 79 per cent of national income – close to the level at which economies are feared to stall and end in social collapse.
And never before has a chancellor presided over a set of forecasts that see “fiscal consolidation” (the sanitised word for austerity) extend over eight years. Not even the Biblical plagues of frogs and boils lasted as long.
These, together with a set of downgraded forecasts from the independent Office for Budget Responsibility, mark a profound change in our circumstances about how economies behave and in our expectations for the future.
Until now the settled view across economists was that recessions lasted briefly; that there is a swift recovery and that the economy in due course resumes its long term annual rate of trend growth of circa 2.5 per cent. In fact, more often than not, growth across the UK bounced back to 3 per cent or more.
This central view of an economy and living standards continually trending upwards with occasional temporary setback has now dissolved before our eyes. There has been no bounce back to trend growth – instead, a relapse into a second or “double dip” recession. Nor is a recovery on a par with those previously enjoyed on the horizon. Indeed, there is growing talk that the economy in the fourth quarter may have slipped back into decline. That opens the real risk of a triple dip recession next year. And if that is in prospect it makes even more likely a credit downgrade by one or more of the ratings agencies that would see the UK stripped of its prized triple-A status.
That may not mean much by way of an immediate jump in interest rates. But it would create problems for Britain’s troubled banks who need to find a further £35 billion of new capital and getting this from overseas will be more difficult and expensive. And it would be a body blow to what is left of the government’s political credibility.
There was a marked absence yesterday of any confident rhetoric on our credit rating. Indeed, such is the chancellor’s concern that even the lowered OBR forecasts for growth in 2016 and 2017 (2.7 per cent and 2.8 per cent respectively) may not be met that he has extended his forecast “consolidation” into 2018. And considering the implications of eight years of low no growth, who would confidently bet that it would stop even there?
If the mood of the household and corporate sector is downhearted now, consider what it may be like after eight years of lack-lustre performance, stagnating markets and frustrated aspiration.
This decade is already taking on a tinge of the 1950s – but in reverse. Instead of optimism that life is getting better, we are heading further into a period of crimped living standards, barely visible growth, already tawdry high streets and a general mood of weariness and defeatism. What is the point of doing anything with money still tight and confidence at rock bottom? “Struggling on” loses out to giving up. Aspiration gives way to a national lassitude.
I would say that a souring of the national mood is as big a threat to this country now as the latest set of missed forecasts on our deficit and debt. Mr Osborne was able to get away with a budget deficit forecast for 2012-13 less worse than widely feared because of the inclusion of revenues from the sale (not yet held) of the 4G telecoms licences, expected to bring in some £3.5 billion in March next year. But reliance on one-off windfalls this year and next such as this only underlines the desperate straits that the government is in.
The Chancellor continues to insist, as I predicted, that he is still “on track” – a claim that the shadow chancellor Ed Balls savaged in his unsparing Commons reply. But I could not help but wonder whether some unease has already begun to seep across the Labour benches at what the future has in store.
It is easy to score points about missed targets and further squeezes on welfare benefits. But given the precarious path that now has to be followed – between the need to bring down our deficit and debt before a massive crisis sets in, and keeping the economy from a further slide down the precipice, it is hard to see any other track than the one being followed. Bar some softening for lower-income households, much the same path would need to be taken by an incoming Labour government. There are truly no miracle cures.
So what, then, is to be done? The measures announced yesterday has softened the full force of austerity, though no-one will be under any illusion that the modest rises (1 per cent in most cases) of tax thresholds and allowances will me good the effect of inflation, currently running at 2.7 per cent.
The projected reduction in Corporation Tax to 21 per cent should help sharpen our attraction as a destination for overseas direct investment. Extension of capital allowances for small firms will also help. But the package for enterprise and business lacked that definitive game-changer that we need to galvanise business back into life.
I would say that we need a hyper-drive on exports, to lift our net trade performance and in particular to boost trade with Asia-Pacific: our exports to China are on a par with those of Switzerland.
At home, “shovel ready” needs to be just that. One effective means here in Scotland is to launch a major programme of house building, augmented by a drive to clear the backlog of major housing developments currently stuck in planning – delays in Edinburgh on such big projects are now reckoned at some 76 weeks. This makes nonsense of the “shovel ready” rhetoric.
We need in these and other projects to aim for world class, aspirational design so that what we build is, as the Victorians achieved, an exemplar and a constant source of inspiration and encouragement.
But above all, we are going to need a change in the national mood. Here is no ordinary cyclical bad patch. We need to get serious about the huge problems that we face, junk the “we are what we spend” approach to life, ditch the brainless celebrity culture and get real about how we get out of this. If eight years of austerity isn’t a wake-up call for all of us, I shudder to think what is.