Hamish McRae: Slowly we are learning to pay off our debts

Economic Studies

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The Independent Online

Um. Well the scare stories were duly wrong. The economy is not back into a slump and it did grow a bit during the second quarter of the year, just 0.2 per cent.

The official figures did carry some cheering detailed points, such as solid growth in the service sector and an estimate that, had it not been for special factors, growth would have been 0.7 per cent, or an annual rate of nearly 3 per cent. But no one should be too delighted, for whatever gloss you put on the numbers we are trudging up the debt mountain somewhat slower than we might have hoped. While we should not worship the measure of GDP, for it does not encompass everything that matters in a society, the plain fact is that if you have to pay off a pile of debt, faster economic growth reduces the pain of doing so.

So slower-than-hoped-for growth has led to a clutch of calls for the Government to have "a growth strategy". The trouble with such a notion is that it assumes that the Government is able to increase growth by passing a few laws or cutting a few taxes, whereas the relationship between government policy and economic growth is much more tenuous. We know that it is possible for a government to puff up growth for a while by borrowing and spending more but we also know that this is a short-term fix that has long-term consequences. We are paying now for the artificial boost to the economy given by public policy between 2003 and 2007, where the combination of high government borrowing and easy credit led to an unsustainable consumer boom. We cannot go back there even if we wanted to.

There are policies that governments can bring in that are likely over a period of time to increase the potential growth rate but the lags are both long and uncertain. They go under the general term of structural reforms, but in truth they are a bit of a hodge-podge. Some are simply removing barriers to growth, such as swifter planning procedures and other regulatory reforms. Some have quite different time scales. Take labour market policies. There are short-term ones such as making it easier for companies to take on temporary workers, which start making a difference in a year or so, but there are others, such as improving education levels, that take 10 or more years to have much effect.

So it is reasonable to ask government not to bring in policies that actually damage growth, and both the previous government and this one have done their share of that. It is reasonable, too, to ask them to remove existing road-blocks. But we would be kidding ourselves if we expected them to have any immediate impact. Besides, social and political pressures may sometimes impose blocks to growth and governments have to be sensitive to those. Look at the way Terminal Five at Heathrow was blocked for years and a third runway, the building of which would create huge numbers of jobs, has been stopped.

Surely the sensible response to those GDP figures is to say that insofar as they are right (and they feel intuitively to be OK, though wait for revisions) they confirm what we already guessed: that the economy is growing slowly. Actually, if you exclude offshore oil and gas output which has been weak recently, this recovery is running a little ahead of the climb out of the 1980s recession. Not great, but not dreadful.

A footnote on the recovery came in some other data out this week from the British Bankers' Association. This showed that consumers repaid £123m of consumer credit in June. Mortgages were up a tiny bit year-on-year, but the BBA noted that bank deposits were rising only slowly as people used any spare cash to pay off debts. This is what ought to be happening: we are at a personal level doing what the Government is trying to do at a national one. It is not a "growth strategy" but it is an essential precondition for sustained growth.

The US needs a shock to the system

Every day there seems to be a new twist in the tussle between the President and Congress over increasing the US debt ceiling, which the country supposedly hits next Tuesday. The latest news, confusingly, is that the government may be able to find some more cash and keep going until September after all.

The thing the rest of us should look for, surely, is not the detail of the US political debate but the signals that emerge for US financial policy. In some ways a default might be a good thing because it would force the US to confront the central difficulty its society faces. This is that it wants substantially higher government spending than it is prepared to fund in taxation.

It may be that some sudden shock – be that US citizens not getting their social security cheques or foreign investors not getting interest payments on US debt – is a necessary step on the path back to balance. You don't need to take too seriously the "right-wing nutters" comment by our trade secretary on the US politicians who have so far failed to do a deal – they are elected representatives just like him – but investors will take it seriously if they don't get their interest when it is due. The danger is that this could have unforeseen consequences for the world banking system, not something needed right now.

Bailouts have hidden costs

Footnote on the great Greek bailout. The cost of insuring German debt has risen sharply following the news that its poor taxpayers are to become partly responsible for Greek borrowings. Bailouts do have costs, even if these are concealed from the people who have to pay them.



h.mcrae@independent.co.uk

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