Whatever George says don’t expect the deficit to fall for many more years
Category: Thought for the day
It’s the Autumn Statement, and things are set to be extended. There will be more years of austerity; longer before public debt to GDP starts to fall; longer before the cyclically adjusted current budget balances. We may be asked to look forward to 2018 as the date when government debt starts to improve. Well I have news for George, the OBR, and all those who buy into the projections. They may be guilty of optimism.
It’s always the year after next. I have referred to it here enough times. The IMF, or OECD, or OBR, or whoever, revise their projections for growth this year and next, but say the year after that things will be back to normal.
It’s the default position. The models assume a sustainable growth rate, and assume that in about 24 months to 30 months’ time, current difficulties will be ironed out and growth will be back to normal.
And every year since about 2008, they revise their projections downwards. So in 2008 we were told that by 2010 things would be back on track. In 2009 we were told to look forward to 2011. Now, as we approach 2013, the year 2015 is starting to appear in forecasters’ models as the year when the UK expands at around 2 per cent.
And within two or three years of a decent growth rate, austerity can be relaxed. That’s the gist of the argument.
The problem with these models is that they build on the assumption that today’s problems were caused by greedy bankers and their recklessness. It will take time to fix the mess they created – of course it will – but the fix will occur eventually, and then we can get back to normal.
I hope I have made it clear by now that I don’t buy that argument. I think the banking crisis and indeed banker’s greed were both symptoms of deeper problems, not the problem itself.
And for as long as governments, politicians, and their advisors – on both the left and right – say that the key to solving today’s problems lies with banks going back to normal, a true fix remains elusive.
Let me draw your attention to two articles published today that may be worth checking out. Everything I have said so far is consistent with the arguments put forward by Allister Heath in the ‘Telegraph’, see: Autumn statement: Why George Osborne’s Budget won’t be a game changer. It’s a good article, but I do slightly disagree. Mr Heath puts emphasis on tax cuts designed to promote growth, and I don’t just don’t buy into that. I know the US and UK are different but the similarities are sufficient for a point about the US to be relevant. The fact is that US government spending as a percentage of GDP has barely risen since the 1960s, and taxes paid by the richest are close to their lowest level since the end of World War 2. Yet the US is haunted by similar problems to those we suffer from in the UK. And there is no shortage of economists arguing that the solution for the US is even lower taxes. I don’t think that argument is consistent with the story of US taxation and public spending over the last 60 or so years.
‘CNNMoney’, on the other hand, chose to focus on the words of Bill Gross. He was talking about what he and his colleagues at Pimco call the new normal. In the case of the US that’s growth of 2 per cent a year; in the UK I guess that is growth nearer 1 per cent. A part of his doubts do relate to government debt, but Mr Gross also puts more emphasis on demographic changes – that is to say what he called the unsustainable ageing of the US population, and technology. Mr Gross says: “In the past decade, machines and robotics have rather silently replaced humans, as the US and other advanced economies have sought to counter the influence of cheap Asian labour.” He cites a study produced at MIT that “affirmed that workers are losing the race against the machine.” And he says: “Technology may be leading to slower, not faster economic growth despite its productive benefits.”
See Bill Gross: New Normal is here to stay I absolutely agree. In fact I have written a book about it – The Blindfolded Masochist – sorry for the cheap plug.
The UK does need to be a more dynamic place, and entrepreneurs do need to be given more encouragement. If possible, the UK’s culture needs changing so that it is more entrepreneur-friendly, and more tolerant of failure.
But during the midst of the new technological revolution, there is a danger that human jobs will be lost to the machine, and company profits will rise as wages fall. Sustainable growth can only occur if demand rises, and demand cannot rise if unemployment increases. I am sorry, I know this is an unfashionable thing to say at the moment, but because of the way technology is pushing wages down, sustainable growth can only occur over the next two decades if governments tax profits more than they do at present, and use the proceeds to create demand.
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