Fiscal Charter Hoopla* obscured big concessions to the City

Gareth Harfoot, September 2, 2006

Gareth Harfoot, September 2, 2006

* Hoopla: “speech or writing intended to mislead or to obscure an issue.”

October has been an eventful month. In Britain, politics is back in fashion. After years of Blairite vacuity, the media have juicy political red meat to plunge their teeth into.  The new Labour leader’s announcement that he would not press the nuclear button led to a veritable feeding frenzy. This was exceeded only by alarm verging on hysteria at the Labour Shadow Chancellor’s U-turn on the Fiscal Charter.

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Can Britain’s “recovery” be sustained?

Fair do. Britain is emerging from the longest slump in more than a century. So good news is welcome, and a little cheer is in order.

But we have been here before. Indeed there have been ‘green shoots’ and other signs of recovery since 2009 – when Labour’s chancellor, Alastair Darling was still in charge.

At the end of 2009 the economy grew at 0.7% as families appeared to start spending again. The savings ratio dropped for the first time in over a year but many analysts speculated that was only because consumers had gone on a spending spree before Alastair Darling hiked VAT from 15% to 17.5%.

In September, 2009 I was interviewed by the Times newspaper, who headed the interview: “Worst is yet to come, says economist”.

“The economy is no longer in freefall” I am quoted as saying “and, as a result, there’s an enormous amount of complacency from politicians, in particular, about what will happen next. I believe politicians have given away the opportunity to restructure the banks and reconfigure the system.”

The Times continued:

“(Pettifor) highlights an admission by the Treasury that one company in three is paying interest rates more than nine percentage points above the base rate and is furious that banks such as Barclays feel able to offer bonuses reminiscent of the pre-crash boom. If the banks do not change their ways, she says, the Government must simply withdraw the insurance guarantees that have kept them alive.

Instead, public money should be used to bail out households and businesses threatened by bankruptcy. “The banks are not using the money productively, yet what we need is for the Government to spend more productively,” she says. “But now there is a consensus that governments should not spend any more in this crisis. That will tip us into a big depression.”

She likens Alistair Darling, the Chancellor of the Exchequer, to a high-wire artist. “He thinks that if he can just keep his eyes closed he will get to the other side. Yet underneath him is this vast debt that has not been cleared off the banks’ balance sheets. Many of the banks are still insolvent and this has not been addressed.”

I was right. The 2009 ‘recovery’ was ephemeral, and was soon to be choked off by Britain’s high levels of private debt. Thereafter Britain was tipped into a prolonged recession, a slump even more severe than the Great Depression of the 1930s when GDP recovered its previous high after just four years.

In 2010 the UK started the year with 0.4% growth. Manufacturing grew by 1.4%. However, there were still signs of fragility in the recovery as exports continued to fall, while the return to 17.5% VAT hit consumer spending. In July, 2010 Professor Victoria Chick and I published“The economic consequences of Mr Osborne” where we argued that

“when sustained, fiscal consolidation increases rather than reduces the public debt ratio and is in general associated with adverse macroeconomic conditions.”

At the end of 2010 the “recovery” stalled in the final quarter after a very cold winter led to a shock 0.5% decline in GDP. The services sector declined by 0.5%, while construction fell 3.3% quarter on quarter.

Things looked grim as Chancellor George Osborne prepared to reveal his £81bn package of spending cuts.

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