Hamish McRae: Politics only confuses economics

The best that can be expected by next summer is an uncertain recovery

The politics are horrid and are going to get worse in the coming months. The economics are horrid and... well, let's test the evidence before concluding that things will get worse, for the arguments there are much more finely balanced. The politics are horrid because you have a government fighting for its life and, therefore, pushing forward every problem into an uncertain future. So it will not reveal details of future spending plans until after the election; it conceals the fact that it is actually giving less of an additional fiscal boost to the economy than most other countries are doing; and it fails to acknowledge that there would have been an unsustainable fiscal deficit even there had been the mildest of recessions, rather than a really nasty one. As for the Opposition, well it dare not come into the open about the scale of the public spending disaster because the consequences, initially at least, will be too painful for the electorate to acknowledge.

The reality is that, after the election, whoever wins it, the policies that the next government will have to adopt will be pretty much the same. It will take two terms of Parliament to bring the nation's finances back under control, for the problem is too big to be corrected in one. Alistair Darling acknowledges this, even if Gordon Brown won't. There is a harsh economic reality that overrides politics, and no amount of spin can alter that.

This is going to go on and on until the election. Those of us who hate it just have to grit our teeth and wait. If you want to know what is really happening to public finances, try to tune out the noise from Westminster and listen instead to the Institute for Fiscal Studies, the OECD, the IMF and the various other responsible bodies that sit outside British politics. Come the election, the central issue will be which party is best able to reform government, transforming it into something that is leaner, more competent and more responsive to what people want.

There is a further issue, however, one that we have mercifully managed to avoid in all elections since 1992. Since then, elections have been underpinned by the sense that the economy is pretty sound. In 1997, the implicit deal that Tony Blair presented to the people was that Labour would not mess up the economy but would use its strength to improve public services. Now that comfortable backcloth is swept away. The best that can realistically be expected by next summer will be an uncertain recovery, while the worst does not bear thinking about. Right now, there is the classic mixture of confusing data you always get at this stage of the economic cycle. We are getting confirmation that in the first quarter of the year things were really dreadful, worse even than we thought. The revised GDP figures show that the economy contracted by 2.4 per cent, the worst three months for 51 years. They also confirm that it started earlier, in the second quarter of last year, not the third.

But if you go down fast, you are likely to bounce back and at least two forecasters I respect, Capital Economics and Global Insight, note that the economy will stabilise and may even have grown in the quarter that ended yesterday. Certainly, the British consumer seems to have recovered some confidence and the housing market looks as though it may have bottomed.

So end of recession? If it were, this recession would have turned out to be unusually short, just 12 months, compared with the 18 months or more in previous cycles. But I do think it is quite likely we will get some sort of bounce through the autumn; it feels as though some business confidence has seeped back and, remember, the economy is boosted by the ultra-competitive sterling, even if that makes our foreign holidays a more expensive operation in sterling terms.

But next year? The threat of a W-shaped recession, when we get a small uplift but then slide back into a second downward leg, was articulated by my colleague Sean O'Grady in this newspaper yesterday; that must be a real possibility. I think I am even more concerned, though, about what might be called the burden on recovery: the extent to which resources will have to be switched out of consumption into paying back debt.

There are at least five reasons to expect a lacklustre recovery by previous standards. Firstly and most obviously, there is the surge in public debt. Leave aside whether this surge was a sensible response to a global crisis or a reckless attempt by government to conceal its incompetence, just focus on the effect. By going from less than 40 per cent of GDP to about 90 per cent, interest costs more than double. Add in a gradual programme of repayment, and a huge wodge of money that would have been available for regular public spending has to go in coping with the debt. That is an inevitable and unavoidable drag on growth.

Secondly, the international financial services industry, on many measures the main driver of growth in the UK, will take some time to recover its buoyancy. So we lose power from that engine. Third, North Sea oil and gas are in decline, so one of the other drivers of growth for the past 30 years will gradually fade in importance.

Fourth, there is our own personal indebtedness. Savings have come up a little and borrowers have benefited from ultra-low interest rates, but rates will have to come up. We cannot for social, moral or economic reasons continue to cane savers. As rates come up, more personal resources will have to go into servicing debt rather than supporting consumer growth.

And finally, adverse demography is starting to take its toll. We are not yet facing a fall in the size of our workforce, unlike Germany and Japan, but we have to cope with retirement of the baby boomers, which is just starting to happen now as people born just after the Second World War reach their 60s. So this will be the first recovery to be held back by demographic factors.

Of course, even a lacklustre recovery is better than none. And it is just possible, just, that when all is done and dusted, the quarter that ended yesterday will be seen as the bottom of this cycle. But we have a mountain to climb and I wish our politicians would level with us just how long that trudge will take and how hard it will be.

h.mcrae@independent.co.uk