Hamish McRae: Securing a recovery is the least of our woes

Share
Related Topics

Everyone is worrying about the recovery. They shouldn't. After a dip in the coming months, the world economy should experience several years of solid growth. Instead people ought to be worrying about whether the developed world can get itself into shape, so that it can come through the next downturn in better nick than it came through the past one.

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

React Now

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

Tradewind Recruitment: Year 3 Primary Teacher

£100 - £150 per day: Tradewind Recruitment: Year 3 Teacher Birmingham Jan 2015...

Ashdown Group: Lead Web Developer (ASP.NET, C#) - City of London

£45000 - £50000 per annum + Excellent benefits: Ashdown Group: Lead Web Develo...

Tradewind Recruitment: Key Stage 2 Teacher Required in Grays

£21000 - £40000 per annum + Negotiable: Tradewind Recruitment: Key Stage 2 tea...

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Day In a Page

Read Next
The number of schools converting to academies in the primary sector has now overtaken those in the secondary sector – 2,299 to 1,884 (Getty)  

In its headlong rush to make a profit, our education system is in danger of ignoring its main purpose

Janet Street-Porter
 

Are multinationals really eclipsing nation states? Don’t bet on it

Boyd Tonkin
Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee