Things can only get worse before they might get better
July 26, 2011
The Coalition government inherited a catastrophic economic legacy. Unlike those heady days of 1997 things surely can ‘only get better’? I am becoming used to reading economic reports from every business sector and special interest groups acknowledging the seriousness of the economic situation, but there still seems to be a common refrain that says ‘…but please don’t cut government spending in our area.’
Well, this morning sees the release of a fresh and uncompromising report into the state of the UK economy, aptly entitled ‘Project Armageddon – thinking the unthinkable’ that says that failing to address the real problem is now not an option. Tullett Prebon’s Head of Global Research Dr Tim Morgan gives an authoritative, detailed and independent account of why the UK is ‘mired in debt’, ‘our economy is flat-lining’, and what as a nation we have to do to kick start growth. In short, we need to do much more practically to assist the UK’s small and medium business sector to grow and prosper.
Dr Morgan starts by telling us the economic situation is far worse than we think or many are willing to accept. Official figures suggest public debt is 60% of GDP, but this excludes the net present value of unfunded public sector pension commitments not to mention the obligations under PFI contracts. Once aggregated this amounts to £1.35trillion, lifting the total public and quasi debit to £2.46 trillion or 167% of GDP. Add in the debt held privately by individuals, families and business which is estimated to be £1.2 trillion, and we really are ‘all in it together’; and this is before continued Government borrowing (running at £140 billion this year) further expands the national debt.
Dr Morgan doesn’t pull his punches. His conclusions make exceptionally painful reading for those responsible for leading us into the abyss, but he also fires more than a warning shot across the Coalition’s bow.
He identifies numerous ‘disastrous mistakes’ by what he describes as ‘Team Brown & Co’ that led us to where we are now. The expansion in public spending resulted in an economy distorted towards sectors driven by debt or by public expenditure. He goes further arguing that fuelling this debt created a falsehood throughout the public sector that borrowing more money (or printing more) was the answer. Under Labour, the Civil Service never had to worry about balancing budgets as more money would be magically on its way.
An interesting dimension to Dr Morgan’s thesis is the social impact the public spending spree has had on UK society as a whole and if left unchecked the likely damage it will wreak on future generations. He says the political desire of the Left to ‘financially feed’ certain social groups with the ideology of entitlement has not only fuelled a ‘state of denial’ about the true condition of the economy, but consequently hindered social mobility and muddied society’s understanding of ‘fairness’. This denial is mentioned on numerous occasions and its political implications should resonate strongly with Conservatives.
Dr Morgan’s prescription for the Coalition is a simple, yet controversial one. So Ed Balls’ can forget about his ‘Plan B’. Put simply, it isn’t going to work as it would be more of the same, and place the UK in far deeper trouble.
All of us are now paying for the catastrophic mistakes of the past decade, and will be for many years to come. Dr Morgan recognises the Coalition’s plan to reduce the deficit must be a priority, but this can only hope to be successful if more is done to promote growth in some key business areas of development in the British economy. This means challenging huge amounts of stifling regulation and burdensome legislation.
Large scale, macro-economic reforms aren’t working and nor will they be of any long-term benefit. As a matter of urgency we need to start implementing micro or supply side initiatives designed to free up small and medium size business. Only such reform will act as the true drivers of the British economy. To get it right we have to ‘think the unthinkable’ and cut the regulatory and taxation framework which hinders many SMEs.
Stimulating the engines of economic growth is the real key to helping the British economy back on the road to recovery. Like him I fear that this will be too difficult a pill for the Coalition to swallow as it requires harsher spending reductions to pay for it. More’s the pity for us all.
In 1979 the incoming Thatcher government signalled unashamedly that the UK was open for business by abolishing foreign exchange controls. For modern Britons it seems almost unbelievable that until then wherever travelling abroad you needed to take your passport to be franked at your bank when taking foreign currency abroad. A similarly iconic message is needed today about our commitment to promoting a new entrepreneurial spirit amongst SMEs. Tax rates needs to be sharply reduced for genuine wealth creators.
The Coalition may have made progress in starting to reactivate our economy after the disaster of three Labour terms, but with Greece facing default, Ireland and Portugal being supported by the European Central bank, and now Spain and Italy hitting turbulent times, Dr Morgan’s report is a stark reminder that for a heavily indebted nation the road ahead will be a very long and difficult one. The faster we deal with it now, the quicker we can repay our children’s generation, rather than saddling them with unsustainable levels of debt as a result of our overconsumption.