Bill Jamieson: Good times just got cut back again

If forecasts are correct, the length of time we’ll have to wait for growth could prove too long to bear

PUBLIC tolerance is a mercurial agent. Under continuous challenge it can stretch longer than the fears and forebodings of governments. But it can also turn brittle and snap under the smallest provocation. Either way, there comes to every era a tipping point, the moment when the mood of a nation changes and quiescence in the reigning state of affairs can be no longer regarded as a given.

We may be some way off such an inflection point, but one is certainly approaching. It may come through a flashpoint provocation such as the outrageous pay rises for FTSE100 chief executives, or inexcusable pay-offs by publicly accountable bodies that so deeply offend millions of struggling households. But in my view it is less the depth of austerity and slowdown we are experiencing but its duration that will prove the break point of public patience.

It is now more than three years since the global financial crisis erupted. We have had a recession, a short-lived weak recovery – and are now back on the brink of a further recession. Yesterday the Bank of England joined with others in lowering its forecasts for the UK economy. For this year and next it sees growth of no more than 1 per cent – less than half the long-term trend rate of growth and way below the level required to bring the budget deficit down to the levels targeted by the coalition. It warned of the growing risk of recession next year if the eurozone crisis is not resolved soon.

If these forecasts are on the button, we are now trapped in the weakest recovery experienced for a century. It is even on course to be longer than that endured in the 1930s Great Depression. In the 1980s it took 13 quarters before output returned to the level it was at before recession struck. In the 1990s recovery took a similar length of time. In the 1930s it stretched for 17 quarters, from the first three months of 1930 to the first quarter of 1934. Today, we are on course for a low growth era enduring for 27 quarters. On current estimates it will not be until the last three months of 2014 that output finally crawls back to the level of its pre-recession peak in the first quarter of 2008.

That is the context in which the latest unemployment figures should be viewed. Across the UK the jobless total rose by 129,000 in the third quarter, taking the rate up from 7.9 to 8.3 per cent – the highest since 1996. Youth unemployment has surged to a new record of more than one million – the highest since comparable records began in 1992.

Here in Scotland unemployment has risen by 5,000 to 215,000, while the number of young people unemployed has now grown to more than 50,000. The SNP administration, lost in the narcissism of small differences, concentrates on the statistic that the rise in unemployment in Scotland is 0.3 per cent while that across the UK is 0.4 per cent. This is the politics of the myopic.

The bigger and more fateful picture is not just that there is no immediate end in sight but that a recovery the coalition government has been banking on has evaporated. And it is unlikely to appear much before 2013 – assuming we avoid a second recession in the interim.

Thus the figures that Chancellor George Osborne will present in the Autumn Statement a week next Tuesday are likely to show further slippage in his attempts to bring down the rate at which our total debt is increasing. Earlier this week the Centre for Economics and Business Research calculated that the budget deficit in 2015-16 will fall to about £100 billion compared with the £46bn on the soon-to-be-updated projections. In turn, the debt-to-GDP ratio will be flat-lining at around 80 per cent of GDP.

Progress towards better times? There is little sign of it. The austerity programme, from lightening, is more likely to intensify as the government strives to protect its triple-A sovereign debt rating.

Continuing cutbacks the public might just put up with were there credible prospects of recovery and improvement. But austerity without hope soon becomes unendurable. That is why the question of how long public forbearance with current policies will last cannot but move centre stage.

What darkens this prospect further is that even today’s programme of public expenditure reduction may be inadequate to that needed to bring spending in line with revenues. A paper this week by economist Tim Morgan of the brokerage Tullett Prebon will bring a chill to many Scottish hearts. It argues that the government and its political opponents differ remarkably little over the appropriate level of public expenditure. Both accept that the overwhelming bulk of the 53 per cent real-terms spending increase of the last decade is a fixture. The gamble of the coalition is that its real-terms spending cuts of less than 4 per cent between 2010-11 and 2015-16 keep public spending very close to current levels and that it is heavily reliant on tax revenues and the revenue proceeds of economic growth to bring the deficit down.

Yet large sectors of the economy are debt-soaked and unlikely to recover soon. “The public are being asked to believe,” he writes, “that this spending increase is irreversible and that a debt-shackled economy, about 70 per cent of which is ex-growth, can afford to let its government carry on spending at this level. This is totally delusional.”

If this is what is being written when youth unemployment is over one million and with no prospect of recovery, voter tolerance is likely to buckle well before the end of those 27 quarters. Historically, no programme of deficit reduction has endured without a large measure of adaptability to ensure public support. Such a programme requires some prospect of economic recovery and a greater sense of fairness and burden-sharing for it to be sustained.

An effective clampdown on boardroom pay excesses is now overdue. Other proposals moving fast up the agenda include a de-cluttering of regulations around SMEs together with tax reductions to boost job creation.

Also under consideration are private sector financed bonds for infrastructure and public housing projects. To this we should add a reduction in the income tax and national insurance burden on working people earning less than £37,000.

This is the scale of policy change needed. It will require big cuts to public spending elsewhere. But greater pain is likely to result from staying with the present course. Look at the jobless numbers reported today and consider where we are now: barely half way through those 27 successive quarters, and a second recession threatening. Who will happily hold out till 2014?