Politics means nothing when deficits have to be cut

It's become clear that the world will take longer than expected to recover from this financial crash. Austerity, for now, is a forced hand across the EU.

Related Topics

We are doing it; every country in the eurozone is doing it; the US is about to do it. Everyone is cutting budget deficits.

The politics vary. Here, it’s about correcting the huge deficit that the Coalition inherited. In France, the new president has wrapped austerity in a socialist package: they are actually cutting their deficit faster than we are. Across southern Europe, the cuts are seen as essential to continued membership of the eurozone, and the pain imposed on people is disregarded. As for the US, everything waits on the election but, under present legislation, taxes are increased and spending is cut starting on 1 January. Whoever gets in, though, the deficit will end up being cut.

There is an extraordinary degree of unanimity. The politics may be different but the policies are the same. This is all the more remarkable when set against the economic backdrop. The growth forecasts in the IMF’s latest World Economic Outlook have been mostly downgraded and the IMF warns that there is a danger that things might turn out much worse if the eurozone fails to hold together and the US fails to cope with its fiscal cliff. The IMF also suggests that the impact of fiscal tightening may be even greater than it thought.

There will still be economic growth. People will still want to buy new cars and improve their homes

Quite a few economists agree with this view. But they have been ignored by policy-makers, and, as far as one can judge, will continue to be ignored in every major developed country.

In the UK, the argument is complicated by two things. One is uncertainty over the scale of the excesses of our boom. The IMF now thinks that the UK was running above its long-term sustainable growth path from 1999 right through to 2007, and that the degree of overheating was greater than in any G7 country. If that is right, government spending at the height of the boom was way above its sustainable level – our “structurally adjusted budget deficit” in 2007 was 5.2 per cent of GDP. If this is right, the Coalition inherited an even worse fiscal position than it thought.

The other uncertainty is what is happening to the economy. The figures suggest there has been no growth in the past year. But the country has created 750,000 jobs since last summer, VAT receipts are up 5 per cent  (i.e. by more than inflation), and car sales in September were up more than 8 per cent on the same month last year.

What has become clearer is just how long it will take for the world to recover from the excesses of the credit boom. You can apportion blame how you like: between governments that spend money they were not prepared to raise in taxation; central bankers who focused on current inflation and ignored asset inflation; and commercial bankers who sprayed loans around to people who couldn’t hope to repay. Whoever takes the blame (I happen to think all three are guilty), digging out is going to take a long time.

In the UK, it probably will be 2018 before we can start reducing the national debt. To get a better picture, we have to wait until 5 December for the Chancellor’s autumn statement and the new estimates from the Office for Budget Responsibility. But it’s clear that things have gone badly wrong this financial year.

There will still be economic growth. People will still want to buy new cars and improve their homes. But it is becoming ever clearer that much of that growth, here and elsewhere, will have to go into correcting the errors of the past.

Sub-Saharan Africa: the next big thing?

Our fixation with what is happening here, in Europe and the US, means that our minds tend to glide over the economic news from the emerging world – forgetting that this is where some two-thirds of the additional growth in the global economy comes from. In economic terms, China creates another Greece every 10 months. The IMF’s new numbers are a good place to start.

China is expected to grow by 7.8 per cent this year and 8.2 per cent next, India by 4.9 per cent and 6 per cent. Those are pretty meaty numbers. Growth in what the IMF calls developing Asia is expected to speed up in the second half of this year to 7.25 per cent.

Of the rest of the world, Latin America is forecast to increase to 4.75 per cent growth by the end of next year, and Russia and its associates to keep growing at more than 4 per cent. But the figure I find most compelling is this one: sub-Saharan Africa is growing at 5 per cent a year and expected to keep doing so. Of course, this is from a very low base and there are huge social and other problems. But to see Africa as a growth engine is a bit different from much of the stuff loaded on to us every day.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Bookkeeper

£23000 - £26000 per annum: Recruitment Genius: This small, friendly, proactive...

Recruitment Genius: Photographic Event Crew

£14500 - £22800 per annum: Recruitment Genius: This is a fantastic opportunity...

Recruitment Genius: Software Developers - .NET / ASP.NET / WebAPI / JavaScript

Negotiable: Recruitment Genius: A Software Developer is required to join a lea...

Austen Lloyd: Corporate Tax Solicitor - City

Excellent Salary: Austen Lloyd: A first rate opportunity to join a top ranking...

Day In a Page

Read Next

After Savile, we must devote our energies to stopping the child abuse taking place now

Mary Dejevsky
A ‘hugely irritated’ Sir Malcolm Rifkind on his way home from Parliament on Monday  

Before rushing to criticise Malcolm Rifkind, do you know how much being an MP can cost?

Isabel Hardman
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower