Good News on Growth but Danger of Return to Boom & Bust Economics Never Higher

Economic
Thursday, December 5, 2013
Ben Harris-Quinney

We welcome the positive news announced in today’s Autumn Statement: a return to growth, increasing employment, a rebalancing of the services sector, and a reduction in the deficit and a shift away from green subsidies.

However, concerns remain over several key areas.

Principly there is a real danger that the manifesto pledges made by the Conservative Party to re balance the UK economy into a more holistic model with greater focus on hi technology industry, manufacturing and export have been forgotten.

The current UK economic growth figures remain reliant on the financial sector and a rising housing market, the bubble that burst in 2008 is being slowly re inflated meaning the danger of returning to the "Boom and Bust" model of the past has never been higher.

Secondly, the UK’s balance of payments positionhas yet to see a substantial improvement. Despite sterling’s large depreciation overall export performance since 2008 has been subdued, and exports in fact fell by £3 billion in the latest quarter.

Thirdly, private sector investment is the lowest since the 1950s and stood at 14% for the year to mid-2013, suggesting there is much scope to improve the business environment and increase the private sector’s role in the economic recovery.

Fourthly, underemployment has reached a record high, illustrating the fragilities that still remain in the labour market. Youth unemployment also remains stubbornly high, and we are concerned as to the extent that this may be structural given that it started to rise before the recession hit.

In addtion the Government's pledge to allocate £375 bn to infrastructure projects, including roads, rail and telecommunications ring hollow in relation to their recent decision to privatise Royal Mail. It is unclear with such high infrastructure spending targets, why the government chose not to incorporate a guaranteed cheap and universal postal service.  The ability to move goods and services quickly and cheaply is integral to encouraging flexible working arrangements and shifting away from an economy which is imbalanced in favour of metropolitan living and working.

Moreover, productivity growth remains weak and real wages continue to fall. Although households are deleveraging progress remains slow, and we are anxious the government’s Help-to-Buy scheme may stall this process as consumers react to borrowing incentives. Furthermore, UK household savings as a proportion of disposable income recently fell to its lowest point since 2009 Q1. Against this backdrop, we are therefore concerned that consumer spending is proving to be the main source of growth in the economy and are not convinced that the recovery is built on solid foundations. That the Bank of England has confirmed the recovery has been based on an improvement in credit conditions that has resulted in a recovery of consumer spending.

 

Thus, despite positive signs, we maintain a cautious outlook on the UK economy. In order to generate a more solid foundation for growth we recommend an urgent revival for supply side reforms to ensure that competitiveness, productivity, work force skills, and the economy’s long term potential are improved. The Conservative Party made a pledge to cut taxes , and whilst corporation tax has been cut and the minimum tax threshold raised, the majority Britons remain heavily taxed in life and death. Furthermore, increasing productivity through supply side reform will be crucial in ensuring that the necessary injection of emergency liquidity does not become inflationary.

Secondly, we urge the government to explain how and when the Help-to-Buy scheme will be withdrawn. Not doing so would make it more difficult to phase out in the future and in turn increase the risk that it becomes a permanent feature of the UK housing market.

Thirdly we encourage the government to extend its guarantee of a inexpensive universal postal service beyond 2025

We also advise the government to continue with its plans to gradually bring spending more in line with revenues in order to provide a confidence boost to business that the UK is getting its public finances under control.

Finally, we are encouraged by recent efforts to enhance trade links with China and propose that the government moves into a new era of realist foreign policy and continues to pursue avenues for building stronger trade relationships with the BRICs to help improve UK export performance.