WELCOME to the new normal. For years, the UK economy has been fuelled by the unsustainable accumulation of debt, public as well as private. Now that the cheap money bubble has burst, and consumers, firms and the government can no longer go on borrowing as if there were no tomorrow, Britain will have to learn to live within its means.
That will mean a much lower long-term rate of growth that reflects the UK’s reduced competitiveness, systemic skills and attitude problems, and our high-tax, high cost and highly regulated economy, factors that were camouflaged during the bubble years. That doesn’t mean zero growth or a Japanese-style stagnation; and it certainly doesn’t mean a double-dip recession. But it means that even a good year won’t feel that great.
Tim Morgan of Tullett Prebon goes one step further than I do in a fascinating paper that destroys the Labour party’s record yet also predicts that the coalition will fail to eliminate the deficit. He estimates that compound growth of 2.8 per cent between 2000 and 2008 would have been less than 1.4 per cent in the absence of what he calls “Brown bubble borrowing” – more than half of the “growth” we saw was artificial and unsustainable, he calculates. Morgan, who unlike most City economists doesn’t mince his words, has even launched his very own Armageddon Project – it seeks to predict what will happen if the coalition is right about the terrible dangers of a spiralling national debt while its opponents are also right that the deficit reduction plan will be undermined by low growth.
Borrowing has become a way of life in the UK. During 1996-2002, total public and private borrowing averaged 4.9 per cent of GDP. Between 2003-2010, however, this had jumped to 11.2 per cent and, with the exception of 2008-09 when this fell to 7.8 per cent, triggering a collapse in output, annual borrowing never fell below 10.4 per cent. The result was fake prosperity. Over the past decade, borrowing drove output in financial services (+123 per cent), construction (+27 per cent) and real estate (+26 per cent), while lavish state spending (predicated on a tax base that never really existed) propelled health (+35 per cent), education (+27 per cent) and public administration (+22 per cent). Output in all other sectors is now five per cent lower than it was 10 years ago.
Six of the eight largest sectors of the UK economy are dependent on private or public borrowing: 58 per cent of the economy is thus unlikely to grow. If retail is added to this, the ex-growth proportion of the economy hits 70 per cent. To Morgan, meaningful growth is thus mathematically implausible, as is the chancellor’s hope of slashing the budget deficit.
I’m slightly more optimistic. Not all the borrowing of the past decade was bad or unsustainable; some of it was caused by the expansion of financial balance sheets, not all of which was pernicious. A booming global economy ought to allow more growth than Morgan seems to allow for. But it is clear that the growth rates being predicted in two years’ time are too optimistic. Giving up and attempting to turn the debt tap back on would be suicide. Instead, we must grow by liberating Britain’s supply-side: cut regulation, eliminate punitive tax rates, shake-up planning rules, stop bashing the City and make employing people more profitable. Armageddon can still be avoided – but time is running out.
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