Stephen King: Sometimes we should never expect politicians to find the right answer
Economic outlook: Fail to deal with the budget deficit and the UK could end up with a sovereign downgrade, higher interest rates and even more pain
Monday 10 October 2011
If his speech at the Conservative Party conference last week was anything to go by, George Osborne – with his offer of "credit ease" for small businesses – is more friendly and compassionate than he is sometimes portrayed. There's no doubt, however, that he is still committed to "plan A".
The economy may be weak, the recovery may be more or less invisible, but budget-deficit reduction is still the main priority. Get that right and, eventually, the UK economy will be able to break free from its debt-heavy chains. Fail to deal with the deficit and the UK could end up with a sovereign downgrade, higher interest rates and even more pain for the typical British citizen.
Ed Balls, the Shadow Chancellor, offers an entirely different perspective. In his view, plan A is precisely responsible for the weakness in the economy we see today. The government has been reckless in its determination to bring the deficit under control. By doing so, the UK economy is being dragged back into recession.
While there is an obvious need to get to grips with the deficit in the long run, Mr Balls is happy to attach himself fully to John Maynard Keynes' famous dictum that, "in the long run, we are all dead". He'd prefer to delay deficit reduction on the view that, with continued government support, the economy can slowly be nursed back to health. For him, the UK economy urgently needs a "plan B".
It simply isn't possible for both of these political heavyweights to be right. But while they slug it out in the boxing ring of the party conference season, their debate is in danger of becoming a mere sideshow. Our economic destiny is being shaped by forces beyond the control of mere Chancellors of the Exchequer – whether they are the real thing or just shadows.
Until recently, our economic salvation depended on so-called "rebalancing". As a nation, we had been living beyond our means, ending up with way too much debt. If we were to grow our way out of this problem we had to find new sources of economic support. Exports offered a tantalising way out. If we were no longer able to buy our own products, perhaps others would buy them instead. And, if they could be persuaded to do so, employment would hold up, confidence would return and the economy would rebound. The ensuing bounce in tax revenues would then allow the budget deficit to narrow in relatively pain-free fashion.
As it turns out, this was neither plan A nor plan B. It was plan "pie in the sky". Rebalancing hasn't occurred. The UK's exports head predominantly to continental Europe which, as you may have noticed, has suffered a few local difficulties itself in recent months. While certain parts of the world – most obviously, China, India and Brazil – have been expanding at a rate of knots, British industry doesn't appear to have the right connections.
As a nation, we've preferred to sell our wares to parts of the world we know well, leaving us at a disadvantage relative to more imaginative producers in the US or Germany who have been far quicker to take advantage of the growing opportunities in the emerging world. The volume of UK exports today is still below its pre-crisis level, whereas both US and German exports are now higher than they were back then.
Sterling's flexibility hasn't been useful
This is particularly surprising given the supposed benefits of the UK's currency flexibility. You may recall that, in 2008, sterling dropped like a stone. This was supposed to make British exports cheaper in euro, dollar or renminbi terms, making us more competitive than our industrial rivals.
And the rest of the world was supposed to buy more of our products. That, though, hasn't happened. The rest of the world has preferred, it seems, to buy goods produced by other countries, suggesting that sterling's flexibility hasn't been such a useful weapon after all.
This matters. Mr Osborne has persistently argued that, in the light of ongoing fiscal austerity, our nation can still benefit from "the ability of monetary policy to respond", as he put it at Chatham House in September. In Mr Osborne's mind, if there is a plan B, it relates not so much to fiscal policy but, instead, to monetary policy, and its impact on the economy via, among other things, a more competitive exchange rate.
Last week, the Bank of England delivered another slug of so-called quantitative easing (QE). This, Mr Osborne hopes, is the shot in the arm that will not only turn the economy around but also allow Mr Osborne and his next-door neighbour to "see an optimistic future" as, indeed, David Cameron urged all of us to do in his party conference speech last week.
Relying on the Bank of England to get us out of our economic fix may not, however, prove foolproof. Although it is undoubtedly good news that the MPC has finally worked out that the major risk to the economy is a lack of growth rather than too much inflation, it's not at all obvious that printing a bit more money to buy a few more gilts will necessarily turn things around.
The UK economy is looking weaker
Part of the problem lies in the inability to explain precisely how QE is supposed to work. Sterling's 2008 decline arguably was a response to expectations of money printing (the first slug of QE came through in March 2009) but sterling's decline has done little to turn the UK economy, or our exports, around.
The UK stock market staged a euphoric rally following the Bank's first experiments with QE but the FTSE has more recently sagged. And, relative to growth expectations published earlier in the year, the UK economy is suddenly looking decidedly weak.
The UK is not alone in facing these problems. The Federal Reserve, America's central bank, conjured up QE late last year and only last month offered "Operation Twist", an attempt to cut long-term US interest rates.
And the European Central Bank finds itself under ever-increasing pressure to put its orthodoxy to one side and come up with some unconventional policies of its own, primarily aimed at easing the eurozone's sovereign debt crisis. But, despite all this unconventional stuff, Mervyn King, the Governor of the Bank of England, conceded last week that "this is the most serious financial crisis we've seen since the 1930s, if not ever".
And it's for this reason that the debate between plans A and B – and, indeed, any other letter of the alphabet – may eventually be seen to be irrelevant as the UK, like other nations, struggles to cope with the evolving global economic crisis. It's no longer about planning for the best but, instead, avoiding the worst.
By that yardstick, we're not doing too badly: in terms of both output and jobs, the Great Depression was far more painful than anything we've experienced during this latest crisis. Unfortunately, for those who need votes, that's a difficult message to sell: knowing that things could have been a lot worse doesn't make the current situation seem too much better.
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