For many, it'll be a very unhappy financial new year
Jeremy Warner, 18:26, Thursday 30 December 2010
It will only need a small nudge to tip some households into destitution, writes Jeremy Warner.
In one respect, Brendan Barber, the TUC general secretary, had it about right in his new year message; for many people, 2011 is going to feel "horrible". Around 60,000 public sector workers will lose their jobs, and across the economy as a whole, living standards are likely to fall. Growth will be sluggish, if not negative in some areas. Inflation will remain high, so real wages will fall. Meanwhile, the Government will struggle to get on top of the deficit.
But that's where Mr Barber's grasp on reality ends. Both he and the Labour leader, Ed Miliband, seem to believe that with different policies, the coming adjustment can somehow be avoided. In so arguing, the Left has descended into fantasy.
It's easy enough to see why they might delude themselves. Despite the worst banking crisis in 100 years, and the deepest economic contraction since the Great Depression, to many people, it hasn't felt much like a recession. Unemployment has remained relatively low by the standards of past contractions, and thanks to rock-bottom interest rates, many households have enjoyed a significant boost to their disposable income.
The collapse in business demand has been countered by higher government spending and robust domestic consumption. House prices have undergone only a mild correction, and thanks to public support the City is once more skipping along as if in the midst of a full-scale boom. Why can't we just continue in the same vein? That's what they're doing in the US, where more fiscal stimulus is being piled on top of yet more quantitative easing. Is it not madness to follow the European periphery into self-imposed austerity?
This is a seductive message but it's also cloud cuckoo land. To think that Britain can be saved from the consequences of years of credit-fuelled excess by continuing to apply more of the same defies logical analysis.
Ministers, meanwhile, suffer from a different form of delusion: a conceited belief in their own powers of economic alchemy. Their message is that things are now unambiguously on the mend, that the mere act of announcing a credible deficit reduction plan has somehow put the worst behind us. Already the sunlit uplands seem to beckon. If only it were true.
I'd never urge ministers to fill the airwaves with pessimism. To stand any chance of getting out of this mess, we need decent private sector growth, and perpetually sounding the air-raid siren hardly helps. Yet there is a sense in which policymakers are not telling it as it is for in fact, the debt workout has barely begun.
To understand why, take a look at where we were meant to be by now, three and a half years into the crisis. By common agreement, the UK economy became dangerously unbalanced during the long years of boom. We weren't exporting enough, and importing far too much. The illusion of rising living standards was kept alive by soaraway credit expansion, rapid growth in public spending and constantly rising house prices. Like all illusions, it couldn't last.
Nobody welcomes a crisis, but it did at least provide an opportunity to get the economy on to a more sustainable footing. Rebalancing it away from debt-funded government and consumer spending and towards private investment, savings and net trade became the over-riding goal of macro-economic policy.
But how much progress has been made? Hardly any. In fact, the policy response to the downturn has only succeeded in making matters worse. Household debt remains at near-record levels indeed, in nominal terms, it hasn't fallen at all. It wouldn't require much say a P45, and/or a rise in mortgage rates to tip many households into outright destitution.
After a brief upward blip, the savings rate has returned to one of the lowest in the developed world. And despite all the brave talk of deficit reduction, central government spending and therefore borrowing reached an all-time record last month. Meanwhile, growth in imports is still outpacing the recovery in exports. Our trade and current account balances remain deep in deficit.
A big uplift in business investment does, admittedly, provide cause for encouragement, but in other respects, the hoped-for rebalancing is still in the starting gates. We live in a policy-induced stupor, shielded from the consequences of past follies by fiscal and monetary stimulus.
That's why it hasn't so far felt like a recession. Yet nothing can be put off for ever and for many, next year will be when the pain starts to bite. Austerity has been on a long fuse, but begins on January 4 with the rise in VAT. The inflationary consequences of devaluation will, through higher interest rates and falling real wages, further damage our already declining living standards.
I'm not trying to argue that supporting the economy via negative real interest rates and government spending was the wrong response to the banking crisis. But nobody should be under any illusions about how these levers work: they could only ever succeed in smoothing and slowing the pace of adjustment. They could never, as Messrs Barber and Miliband seem to believe, eradicate it. Next (Xetra: 779551 - news) year comes the moment of truth.
Nails it. CNAM