Wednesday’s growth figures were as bad as anyone could have anticipated.
And while there’s a good chance that they’ll change – the recession could yet be revised away – none of this alters the fact that the UK economy is in the doldrums. Being economically becalmed is bad enough, but we’re even slipping into a recession without a meltdown in the Eurozone.
As navigators know, one risk of being stuck in the doldrums in a ship under sail is your vulnerability to rapid climatic changes such as violent storms and hurricanes. If the Euro-squall gets worse, we’re in deep trouble. So the question for Captain Osborne is how he plans to get us underway.
Back in June 2010, at the emergency budget, the Government’s plan was to allow loose monetary policy and a devalued sterling to boost exports and hence stimulate corporate investment. In other words our neighbours would tow us out of the doldrums and into the trade winds. But unremitting bad news from our main trading partner, the Eurozone, hasn’t helped and growth there looks as far away as ever.
That’s not the government’s fault, but it has rather sunk their strategy. The growth part of the plan has failed and needs a rethink. If foreigners won’t help out HMS UK, we’re going to have to get back to fair winds under our own steam. But with households and government retrenching, it’s hardly surprising that UK corporations have no incentive to invest.
The trouble is, the government has staked its reputation on ending the deficit. And it’s taken as self-evident by most commentators that a deficit reduction strategy (austerity) is the antithesis of a growth strategy (fiscal stimulus). On this reading, the question is only about how much more bad data it will take before Mr Osborne junks deficit reduction and opts for a borrowing-fuelled stimulus.
In response to the growth figures the Treasury’s response was that ‘one thing that would make the situation worse is more borrowing’. The Government’s attachment to deficit reduction is unwavering. The Chancellor isn’t going to ditch the deficit reduction plan.
Respected UK advocates of a deficit-funded stimulus, including the FT’s Martin Wolf, NIESR’s Jonathan Portes and Simon Wren-Lewis of Oxford University, point to mounting evidence that this adherence to austerity may be a mistake. But putting the economics of whether the policy is wise to one side, it’s clear that, politically, such a tight u-turn would cause HMS UK to list so badly as to imperil the government, quite apart from leaving Mr Osborne’s career on the rocks.
So what’s needed is as much a political as an economic exit strategy for the government. One that allows the Chancellor to stick to the deficit plan while also providing a massive fiscal boost in the form of infrastructure investment.
If you subscribe to the conventional wisdom about the stimulus or austerity binary choice, there is no such exit strategy.
That’s wrong. Deficit hawks can also engineer a fiscal stimulus through infrastructure investment, funded by cutting low-growth spending and temporarily raising taxes. The two are not opposites. If the Chancellor followed the SMF’s funded stimulus plan, or indeed the last week’s advice from the IMF on this, he could rightly claim a much bigger stimulus than that being proposed by Labour while sticking rigidly to the deficit reduction plan – as politically he must.
The macroeconomic debate about growth is largely apolitical. But only a combination of good politics and economics will give us a growth plan worthy of the name. The clamour for the Government to throw deficit reduction overboard doesn’t offer the Chancellor the needed face-saving solution. His opponents may as well ask him to walk the plank. Nor would mutiny be in anyone’s interests right now, with sovereign debt markets in their current febrile state.
A funded stimulus plan to get the economy moving again provides the political and economic answer. The Chancellor should take it.