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The Coalition and the Economy. Professor Brian Morgan UWIC Lloyd George Society 19 February 2011. Which Coalition?. I assume I was asked to talk about the London one! But I will have a few words to say about the Bunch in the Bay
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The Coalition and the Economy Professor Brian Morgan UWIC Lloyd George Society 19 February 2011
Which Coalition? • I assume I was asked to talk about the London one! • But I will have a few words to say about the Bunch in the Bay • The presentation will focus on the economic situation facing the Coalition in 2011
The Great Moderation • January 2007 Gerard Baker, the US editor of the Times : • “we are living through one of the great transformations of modern history; a period of unprecedented economic stability. Recessions were once as frequent as World Cups Now, they hardly happen. something historic has happened in the past quarter of a century. • The business cycle has not been abolished, but in the US and the UK, it has been stretched, to improbably great lengths. Economists have coined a term for this remarkable period of stability …... they have called the current era the Great Moderation.”
The cause of this remarkable stability? • “It is the liberation of markets ….... have had a damping effect on the fluctuations of the business cycle. ... The economies that took the most aggressive measures to free their markets reaped the biggest rewards……. • Similarly in 2004, Ben Bernanke: • “the sources of the Great Moderation will continue to be debated …….. I have argued today that improved monetary policy has likely made an important contribution. …. This conclusion makes me optimistic for the future, ………..” • Then the credit crunch arrives, but UK already in trouble
Government Expenditure and Tax Revenue as % of GDP The Fiscal Deficit in the UK Budget Surplus
Real UK Government Expenditure as % of GDP Tipping Point
Public Spending • The Green Budget (2010), the cuts in spending, "would reverse almost all of the increase in departmental expenditure . . . as a share of national income since Labour took office". • Effectively by 2015 we will have, then, marched public spending up to the top of the hill and marched it down again. • (see top left chart below) • Legacy for the expenditure splurge?
Five key factors affecting Growth • Impact of Cuts • a 1% of GDP fiscal contraction reduces GDP by 1% p.a. in years 1,2 and 3 (if expenditure reduced in isolation), • GDP growth expected to be between 1% and 3% p.a. on the pessimistic / optimistic scenarios (2011 – 15) . 2. Consumer spending • - increased by 1% in 2010 after collapse of 3.2% in 2009. 1% increase expected in 2011 • but slow rise in wages, house prices falling and credit in short supply, could lead to negative 1% in C. 3. Industrial production • Been a huge fall in investment expenditure. • Investment has not been a key driver of the recovery in the last 4 recessions
Labour market: evidence of labour market flexibility Current 1980s 1990s Months Since Recession Started Source: ONS
Problems of National Debt • Interest Payments. The cost of paying interest on the government’s debt is very high. • In 2008 Debt interest payments were £31 billion a year (est 2.5% of GDP). • In 2009, they were £35 billion (similar to defence budget) - debt interest payments • 4th highest spend after social security, health and education. • By 2015 they will be 9% of GDP • The National Debt will then be 90% of GDP • Inevitable ‘Crowding out’ of private sector investment / spending
Public sector net borrowing, % of GDP, 1990s and 2010s Source: Andrew Sentance
Current Scenarios • A credible deficit reduction plan is needed to keep the rate of interest on government debt manageable • But to do this G has to be reduced from 48% of GDP in 2009 to 39% of GDP in 2015 - this is a sharper fall in spending than any other country bar Ireland and Iceland. • The burden will fall on HE, Environment Dept, and Housing; as well as LAs. • NHS and Energy will see an increase
Fiscal assumptions of the Coalition • Trend economic growth is permanently lower for next decade • Government expenditure and taxes need to be brought back towards 40% of GDP • The national debt to income ratio must be reduced steadily from 2015 - when it is likely to reach 90% of GDP. • Fiscal contraction has to begin NOW – to prevent a meltdown in confidence
Economic Growth • Without economic growth the national debt will be over 100% of GDP in 2015 • Where will growth come from? • Investment in IT industries – broadband etc. • Low carbon and renewable industries – green investment bank needed • Investment in transport infrastructure – infrastructure investment bank needed • Better, faster planning and investment in skills
And Wales? • Implications for Wales • The Welsh economy is fragile and has the lowest share of private sector employment • WAG has to eschew its perennial interest in peripheral vote winning policies • Focus instead on implementing a robust economic development strategy that is focused on private sector expansion
74% of UK average Source: UK Competitiveness Index 2010, www.cforic.org
Source: Office for National Statistics, Labour Force Survey, Labour Market Statistics
Regional UK Competitiveness Index 2010(UK=100)(Robert Huggins UWIC) Implications Source: UK Competitiveness Index 2010, www.cforic.org
What’s needed: • A short sharp action plan with imaginative steps in the direction of involving the private sector in delivery of business support • Need to encourage WAG to stick to the knitting, to stop inventing new things on which to spend money • And make growing the economy the overarching aim of its economic renewal programme.
