Chancellor George Osborne will give his autumn statement later this week (December 2012) with GDP 3.1% below the 2008 pre-recession peak.
The peak was 18 quarters or 4.5 years ago and with average annual growth rates of 2.5%, we are more than 13% behind where we could have been if the recession had been avoided. That’s why the pain feels severe. Borrowers have been protected some extent by the low interest rates but for those with savings, the impact combined with high inflation has been painful.
More worrying the government continues to spend money it doesn’t have. Despite all the talk of austerity, the numbers reveal that government non-capital expenditure is an inflation adjusted 6.7% increase on pre-crisis levels.
That doesn’t sound much like an austerity program to me and any business that promised its bankers that it would cut costs and had to admit that it had done the opposite, would be in for a very tough meeting as the owner’s credibility would have been shot to pieces.
Restoring Aggregate Demand To Boost The UK Economy
The problem with aggregate demand is that the consumer expenditure is 5% down but we know that was fuelled by excessive debt that has to be paid back.
In fact in the short term the economy needs consumers to splurge like crazy but long term there are big problems if savings for old age don’t increase massively. It’s a complete mystery to me how any government can do the right thing for the long term when it means sacrificing short term growth and the feel-good factor that boosts polls and helps politicians to be re-elected.
Money is trapped within companies who are reluctant to invest. Tax breaks like the old 100% capital allowances would help.
The service sector is above pre-recession levels just, manufacturing is down by 8%. The steepest fall is construction, a whopping 18%.
A walk down any high street or shopping centre shows we don’t need more stores.
We do need more houses as the basics of supply and demand have kept prices at high levels against average incomes although there have been some falls.
Increasing supply will push down prices, hurting the haves but helping the have-nots. Pension funds could be encouraged to get involved with social housing.
Infrastructure projects also offer a way to boost the economy, either publicly or privately funded. Incentives need to be put in place to help those with the funds to invest in these big projects and the government could use its ability to borrow at remarkably cheap levels to fund capital projects.
The risk is that the AAA credit rating for the UK will be reduced. In all honesty, without sustainable growth, that’s likely to be reduced any way. The more risky spending is the costs of funding all the good causes which make demands on the tax payers money.
That may sound harsh but it’s frightening how small the percentage of the people who make a net contribution to the economy is. It’s easy to keep spending on good causes because morally it’s the right thing to do. The trouble is that means taxing those with money and they can only be pushed so far, before they push off.
What Do You Think Can Be Done To Boost The Economy?
I’d like to know what you would do if you were the chancellor with the responsibility to manage the country’s finances.
I maintain that the 2010 election was a good election for the Labour party to lose. Those golden rules of Gordon Brown including keeping national debt below 40% and balancing annual deficits and surpluses out over the economic cycle still sound good to me. It’s a shame it didn’t happen. Poor Prudence.
Paul Simister is a business strategy coach who helps business owners to differentiate their businesses and develop winning strategies. Get your free copy of The Six Steps Profit Formula.
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