Thursday, 26 April 2012

Double Dip Recession

So, the inevitable has happened - the UK economy contracted by 0.2% in the first quarter of 2012.

It can't be argued that this is unexpected - the deepening crisis in the Eurozone - our largest single export market - has made things increasingly difficult. However, it would be unfair to place the blame entirely on the Euro crisis.

No, this recession (although with the amounts involved, it's more of a stagnation) is home-grown.

The Labour hard-left have just about gone purple in the face, crowing 'too far, too fast' and Ed Balls is looking smug, vindicated in that his nonsense policy of 'spend, spend, spend' is apparently proven correct.

Except that it isn't.

The Government have fucked up, and badly. But Labour's current economic plan would make things worse, not better.

First of all, let's have a look at the case that Labour make: that 'austerity' has caused the double-dip recession. Well, in the most recent Budget Report, total public spending headlined at £683 billion. But in Labour's last Budget, in 2010, total public spending was £671 billion.

That's right. The Government is spending more than Labour did in cash terms. If you take into account inflation (which has been averaging at 4.86% on RPI terms since the last Labour Budget, according to the ONS) then we're looking at real terms cuts of about 2.93% of total expenditure.

So, the austerity argument doesn't really wash. The Government has not been implementing deep spending cuts - they have simply slowed the rate at which spending has increased, and allowed inflation to do the rest. They've bet on reducing the deficit through rising tax revenues, not spending reductions.

Of course, therein lies the problem. Tax revenues have risen, but not by the degree expected by the Government. The private sector recovery simply hasn't happened. Austerity hasn't killed the recovery, because we haven't had austerity. We've had a trimming of public spending.

Labour's proposals would not even see this trimming of the deficit. They would be borrowing £20 billion more than the current Government. And this is at a time when lenders to sovereign nations (or as I like to collectively call them, 'the bond markets') are calling into question their ability to repay debt.

The Government, through a combination of trimming the deficit and printing money like it's going out of fashion to fuel inflation, have managed to convince the bond markets that they can service the debt. With no credible plan to reduce the deficit and no political will to do so either, the bond markets would have a field day with a Labour Government. Gilt yields would go through the roof, and borrowing money would become a lot more expensive. This, in turn, would mean that more taxpayers' money would go to foreign creditors in interest payments, rather than being used to fund public services or pay down debt.

Labour's policy of 'spend, spend, spend' is still utterly discredited. See Greece for further details.

So, where have the Government gone wrong?

They fostered their hopes for recovery on a private sector expansion. Reasonable, given that private sector growth is the only way that any country in recession has ever got out of it. Their problem has been that they have utterly failed to engender an environment where a private sector recovery can happen.

Regulations are strangling the economy. Perverse labour laws that make it difficult for companies to reform their staffing make things difficult. Direct costs to employment such as Employer National Insurance are at an all time high. The tax credits system actively disincentivises work through its marginal tax rates in excess of 70%. The Income Tax system strangles demand at the top of the earnings table, stopping money from trickling down to others. The benefits system works to continue imprisoning people in poverty. The Government, in a bid to raise revenues, has hiked taxes on consumption, stifling the demand for private sector goods and services. Inflation continues to soar, rises in prices far outstripping rises in wages, again stifling demand.

In short, rather than grasp the nettle and cut public spending deeply, accompanied with regulatory reform and deep cuts to taxation, the Government took the politically easier route of tweaking the existing system, crossing its fingers and hoping for the best. And it's now exploded in their faces.

Don't get me wrong, the Government has fucked up, badly. Osborne is probably discredited as a guiding influence as Chancellor now - another incompetent in a Government full of them. But Labour's alternative is actually worse.