It's a year on. We have had the politics, indeed rather more of the politics than some of us would ideally like, but what about the economics? Economic affairs have long lags so that the performance of any one government is, for the first few years at least, the function of the work of its predecessor. But I think it is possible to say something about what has happened in the past year and be prepared to make some judgements about the relationship between economic performance and the decisions of the Coalition.
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The starting point must surely be the pace of the recovery. Yesterday saw the latest update of the monthly running assessment of the economy from the National Institute and that is a good place to start. The top graph shows its assessment of this recession vis-à-vis those of the 1930s, 1970s, 1980s and 1990s. As you can see the recovery was clearly in place a year ago, around month 24 on the graph, but it was pretty weak. Since then there has been a reasonable amount of growth but over the past six months, if these figures are correct, progress has undoubtedly been disappointing. We were tracking the profile of the 1980s recession and recovery but we seem to have fallen a bit below it. It is not a case of a double-dip but it is not the strong, steady climb that you'd like to see.
On the other hand if you look at other data on the economy, in particular employment and hours worked, the recovery looks somewhat brighter. For every job being lost in the public sector two or three are being created in the private sector. Exports are doing well too, with quarterly growth of 5 per cent in the first three months of this year. The bottom graph shows the monthly output figures for industry and services together with a lead indicator showing demand for labour, the Monster employment index. Commenting on this, Simon Ward, the economist at Henderson, notes: "The Monster index of online job vacancies rose by an annual 14 per cent in April, up from 9 per cent in March, despite a fall of 8 per cent in public sector openings."
My own judgement is that the GDP figures will eventually be revised upwards, as they usually are, but it may take two or three years before the data is all in and we will know for sure.
If the pace of growth is somewhat disappointing, the pace of correcting the deficit is slightly encouraging. It seems to be coming down just a touch faster than projected in the emergency Budget last June. On the provisional figures the deficit was £141bn for the financial that ended in April, as against £149bn expected then by the Office for Budget Responsibility. This is nothing to shout about and the deficit-cutting programme has hardly begun but you could at least say that nothing has gone seriously wrong with public finances over the past year.
That leads to a debate about the whole strategy of the Government: to try to eliminate the deficit during the life of this parliament. That strategy is understandably challenged by the Opposition, understandably because the explosion of the deficit happened on its watch and therefore it has to take the position that it was not as serious as the Government asserts. The Government, for its part, has to say they are necessary because otherwise they would be doing something that is bound to be unpopular.
It is hard not to get sucked into the political debate about this and this is not the place for that. My own personal feeling is that it is difficult to sustain the argument that the pace of the cuts has undermined growth because the cuts, for all the noise about them, have hardly begun. On the other hand many of us feel uncomfortable about the detail of what is being done, the charge being that the Government may be getting the macroeconomic thrust right but may be getting some of the detailed application wrong. New governments, as a wise civil servant recently remarked, have to learn how to govern.
What has certainly been achieved is credibility with the world's financial markets. As a result the somewhat bumpy run of data has been received in a reasonably relaxed way. There has been no run on sterling. The Government can still borrow internationally at very low rates. This is a bit of a relief, for the mood over the past year has become less tolerant of governments that fail to sustain a deficit-reduction programme. I don't just mean Greece, or indeed Ireland and Portugal. The fall of the dollar over the past year, particularly when measured in gold or oil, shows how even the US is becoming subject to international disciplines. The UK Government does at least have freedom to manoeuvre. There is all this talk of the need for a Plan B if things turn out worse than expected. Well it does have a Plan B: to continue with Plan A but do it a bit slower.
There has, however been huge failure on one front, the control of inflation. We are now being warned by the Bank of England that the annual increase in the consumer price index may reach 5 per cent later this year. That is far higher than in the eurozone or the US. The question is to what extent this is the fault of government policy, or the monetary policy of the Bank, or is the result of global events beyond UK control.
There is one specific issue within the Government's control, which is the impact of the rise in VAT. Maybe that rise could have been delayed but beyond that it is hard to lay too much blame on coalition shoulders. The problem is mostly a global one and the only way we could have offset that would have been to have maintained a strong sterling policy. That we haven't is understandable and in a global recession it is helpful to have a competitive currency. It is fair, however, to point out that the Bank of England has consistently underestimated the inflationary danger for many years. Accordingly it has had to write a string of letters explaining an overshoot of the target but not one single one about an undershoot. But the Bank's setting of interest rates is independent. In any case its errors of judgement go back to long before the advent of the Coalition. So it is hard to see what the Government can or indeed should do here, aside from making sensible appointments to the monetary committee.
No government can choose the circumstances when it takes office: it has to deal with the world as it is, not as it would wish it to be. This government is fortunate in that the turning point in the global economic cycle had been reached but unfortunate in inheriting a larger fiscal deficit than any other major economy. The structure it has put in place, the independent Office for Budget Responsibility, is generally accepted as a success. But these are early days: Gordon Brown's golden rules not to borrow for current spending and also not to allow the deficit to rise about 40 per cent of GDP seemed a success after the first year – indeed were a success until the rules were broken. Only a wild optimist would call this first year an unqualified success; but it could have been an awful lot worse. Fingers should remain crossed for year two and beyond.Reuse content