Let me first cite some evidence as to why we should expect the recovery to continue. Exhibit A is the recovery in world trade, which according to Pascal Lamy, head of the World Trade Organisation, is expected to grow by 13.5 per cent this year, one-third higher than previous forecasts and the fastest ever recorded since 1950. More interesting still is the breakdown of this growth, for volume in the developing world is expected to rise by 17 per cent, whereas in the developed world the increase is "only" 11 per cent. True, this great leap forward was from a long way back, for 2009 was dreadful. The previous biggest leap in world trade was in 1976, also following a very bad year.
The second bit of evidence comes if you compare output in this cycle with what happened in the 1970s. If you look at the developed world, the loss in output now is much greater than then, and we are still two years before we get back to the last peak. But if you look at the world as a whole, the trend in industrial output almost exactly tracks the 1970s, and has just passed the February 2008 peak. Some projections by Simon Ward at Henderson suggest that the output of the seven largest emerging economies should pass that of the G7 within about five years – ie during this expansionary phase.
The final bit of evidence supporting the recovery comes from the National Institute's work comparing this UK cycle with previous ones. This shows that we are now spot on the track of the 1980s recession: we went down faster and bottomed a little deeper, but we have recovered that lost ground. This is not to say that there won't be some sort of pause in the coming months – I personally expect several wobbly months – but the similarity of this cycle to the 1980s is so strong that it is really unlikely that the pause completely derails recovery.
So let's assume that we have seven years of reasonable growth, seven Biblical fat years, if you will. Now focus the difficulties of getting things into shape during that time. Start with the UK, for we are in a conference season that runs up to the spending cuts to be announced on 20 October. The Lib Dems have taken some stick for supporting the spending cuts and the defence of Nick Clegg and others was that there was no choice, given what was happening to confidence in public finances in the rest of Europe. I happen to agree with Nick, except that all this was obvious before the election: the issue was not one of politics, it was one of mathematics.
But now consider what our national debt might become in 2015. If the Office for Budget Responsibility's projections are right, we will have debts of about 67 per cent of GDP. Another couple of years of good growth, with solid surpluses, and maybe we can get that down a bit further. In 2008, debts were below 40 per cent of GDP. But even if things go well, we are likely to go into the next downturn with national debt that is still more than one and a half times as big as our debts at the beginning of this recession.
Worse, a much higher proportion of tax revenue will have to go into paying interest on debt and not be available for services. Just yesterday we had some bad numbers, showing the highest borrowing for an August ever. You should not worry overly about one month's figures, but note that in August last year the interest bill on the total debt was £1.3bn whereas this August it was £3.8bn.
Other countries will have it worse. It is hard to put firm numbers on public debt five years in the future, but even Germany looks like having debts of 80 per cent of GDP, and for the US the projections are for debt being more than 100 per cent. As for Japan – well, its debt may be 250 per cent of GDP, a level that can never be repaid.
Several disagreeable conclusions flow from this. One is that governments will not be able to offset any future slowdown in growth by increasing national debt, or at least not to any significant extent, unless they really crack down on debt during the next five or six years. Another is that some will default on their debts. And a third is that the amount of money available for public services will go down and down, not just here and for the next five years but everywhere and for the foreseeable future. A recent report on Scotland's public finances warned that it might be 2025 before real spending returned to its present level.
It is a different world from anything we have experienced since, I suppose, the Second World War. We have managed to scramble through this recession; now is the time to focus on coping with the next one.
What the deficit does
An irreverent thought. All of us are worried about the low flow of funds into mortgages and that the flow into companies is actually negative – in other words, companies are paying back more debt to banks than they are taking out in new loans.
In July, according to new figures out on Monday, the flow into mortgages was just £100m, compared with a monthly average of £9bn in 2007. For companies, in July they repaid £2.5bn, whereas on average in 2007 they were borrowing an average of £7.5bn a month. But there is plenty of money around. In August our government managed to borrow £16.7bn, whereas back in 2007 it was borrowing an average of less than £3bn a month.
So back in 2007 companies and house-buyers were borrowing almost exactly the same monthly amount as our government is borrowing now. Ask the question: could it be in part at least because the government is borrowing so much that other would-be borrowers are crowded out? In other words, is the deficit part of the problem, not part of the solution?
h.mcrae@independent.co.uk
For further reading
Independent Budget Review: the report of Scotland's Independent Budget Review Panel (The "Beveridge Report", scotland.gov.uk), July 2010
Amol Rajan
A weekly update from the Editor
