The Wilting UK Economy
Dr. Graham Gudgin and Jo Michell of Economists for Rational Economic Policies challenge the prediction that the UK will remain the fastest growing economy in Western Europe
SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to the Real News Network. I’m Sharmini Peries coming to you from Baltimore.
Economists for Rational Economic Policy has just released the UK February quarterly report. To discuss it I’m joined by two guests from London, Dr. Graham Gudgin and Jo Michell. Graham Gudgin is a senior economic advisor for Oxford Economics, and Jo Michell is an economics lecturer at the University of West of England. Thank you both for joining me.
JO MICHELL: Hi.
GRAHAM GUDGIN: Hello.
PERIES: So, Jo, let me begin with you. Give us some broad strokes in terms of a synopsis of the findings of this quarterly report.
MICHELL: Well, this report is our view on where the UK economy is currently at, and where we think it will be going over the next few years. It contrasts with the official projections produced by, for example, the UK government’s budget office and by the Bank of England in that we’re considerably less optimistic about the prospects for UK growth, for wages, for employment, and also for various measures of debt, government debt, and private debt. So we take a quite different view to the sort of consensus line at the moment coming out of the official UK institutions.
PERIES: All right. Graham, let me ask you, your section of this report is very appropriately titled UK Economy: Wilting Expectations. That is very telling. Give us a brief synopsis of your section and what your findings were.
GUDGIN: Yes. We start with the government’s optimism just before Christmas, when everything seemed to be going well, and the UK economy was the fastest-growing in Europe. Everything seemed to be good. Our own forecast suggested, as Joe has just said, something really much more pessimistic than that. And it looks like the government, in the form of our Chancellor of the Exchequer, the Finance Minister George Osborne, is really coming in, more into line with our own forecast, now. Suddenly after Christmas he became much more pessimistic, as did Janet Yellen at the Fed, as well.
I think what’s happened is the Western governments have been rather spooked by the very negative start in world stock markets after Christmas, and suddenly got rather more pessimistic. In the case of the UK I think the, our Chancellor is, is really getting his retaliation in first, and making sure that he can blame other people before anybody starts blaming, blaming him for a less good outcome. As Jo was saying, the official forecasts are nevertheless lagging somewhat. They’re still, the latest ones are still pre-Christmas. And they suggest that the UK economy GDP will grow about 2.5 percent per annum, which is pretty much in line with long term trends. But we think that’s really very optimistic, and growth in some years may be below 2 percent.
And a key thing, I think, is that growth probably won’t be fast enough to maintain the recent fall in unemployment, and we expect unemployment to start rising, probably from early next year. And that, that will change the atmosphere considerably. As you perhaps know, Sharmini, we’ve had something of a jobs boom in the UK and unemployment has been falling much faster than expected. But we really think that’s going to come to an end quite soon.
PERIES: So give us some sense of what you think is leading to this wilting growth.
GUDGIN: It’s really the government’s own austerity program. The Conservative government we have believes in trying to get down the level of debt, public sector debt, in the UK, it’s trying to cut public expenditure. And the optimistic belief is that will somehow have very little impact on the wider economy. There won’t be what Keynes expected, there won’t be a negative multiplier. So it, as the government cuts expenditure, you’re cutting people’s incomes, you’ve cut tax revenues, and the whole economy grows more slowly.
So the government’s view is that that won’t happen, and our view is that it will happen. As the government cuts expenditure it will start a downward spiral in the, in the wider economy. So we put the blame fairly and squarely on the government’s own cuts.
PERIES: Now, the diving oil prices is having a positive impact in places like the United States, where it’s acting almost as if it’s a stimulus. And is that not happening in the UK?
GUDGIN: Yes, it is. The main impact is on inflation, and inflation really for the first time in half a century in the UK has reached zero. And that’s very much due to the fall in oil prices, and other commodity prices as well.
In terms of GDP, the level of output is probably giving us a boost of about a quarter of 1 percent, and we don’t think that that will be big enough to offset the negative impact that we’re anticipating from the government’s own expenditure cuts.
PERIES: And Jo, you’ve focused on the current account. Give us a sense of what that is, first, for our audience who’s not following the economic indicators that well, and then secondly what your findings were.
MICHELL: Well, the current account measures, essentially, how much the UK is borrowing from the rest of the world. So that’s not just due to trade deficits, IE importing more than we export, it also is affected by how much income we receive from our investments abroad versus how much we pay out to those who are invested in the UK from overseas. And like the United States, United Kingdom has been one of the economies which has run a deficit, an external deficit, meaning that it’s borrowed from the rest of the world. For almost the whole of the last three decades the United Kingdom has been borrowing from the rest of the world.
Now, what that means is that when the economy is running below capacity when demand is low, when wage pressures are low, as is the case in the United Kingdom, trying to sort of overcome that lack of demand, as Graham said, in the face of government austerity as well, when more spending comes into the British economy, when consumers increase their demand and so on, that kind of leaks out into the rest of the world so that any measures you take to try and stimulate growth and stimulate spending are less effective than they would be.
The other thing about the current account deficit is it implies an accumulation of debts, and an accumulation of debts to the rest of the world. And what we’re increasingly seeing in the UK is that those debts are accumulating in the household sector as the government tries to cut its deficit, to reduce its borrowing. That sort of moves the borrowing around and moves the debt around the economy, but it’s actually rather hard, particularly in a period of low growth, it’s rather hard to really run debt out of the economy and pay debt down.
So it’s a two-fold effect. One is it contributes to the problem of getting employment and output up again, and at the same time it contributes to the problem of rising indebtedness, particularly among households.
PERIES: So especially in light of the Chinese economy and slowing down, this must also be creating a great deal of stress on the U.S.–sorry, in the UK economy. Give us what this means in terms of what they were predicting in terms of a recovery for the economy.
MICHELL: Well, it’s true that the predictions by the Office of National Statistics and the Office of Budget Responsibility at the end of last year are already pretty much, I think, regarded as a lost cause. Nobody really believes the level of optimism in those reports.
The problem for the Chancellor is that he based his spending assumptions and his spending projections on those very optimistic reports which, as Graham says, he’s now realized, I think, quite rapidly that those reports were much too optimistic and he’s hedging his bets quickly, trying to get in ahead of the curve and make excuses.
Now, the projections we have in our report I think didn’t really take into account the extent of the sort of global turmoil we’re seeing at the moment. Collapsing Chinese demand, the U.S. economy is already looking a lot less strong than it was. So possibly even our less pessimistic projections may turn out to have been on the optimistic side given what’s happening globally, and evidence of a sort of generalized slowdown.
PERIES: All right. So let’s turn tables somewhat here. Give us a sense of the kind of programs that could be put in place to internally stimulate the economy and put it back to work and growth.
MICHELL: Well, the first thing would be to reverse the austerity program which George Osborne has in place. And as Graham said, it’s becoming self-defeating in that it’s squeezing demand out of the economy as we see deflationary pressures and falling growth. Then the debt-to-GDP ratio will actually not fall as rapidly as the Chancellor would hope, given the scale of his cuts.
So the first thing, I think, would be to accept that public debt probably is less dangerous in the long run that private debt. And if you’re going to have to have one or the other, it’s safer to have public debt in the short run. People are actually very willing to lend to the UK government. Interest rates are very low at the moment. So a reversal of the austerity program by George Osborne would be the first step.
Beyond that I think we need to look at the historical pattern which has shown falling investment in the UK, and increasing reliance on imports from abroad for our manufactured goods. And that will require quite substantial rethinking of attitudes towards industrial policy, for example, attitudes towards managing the external deficit. And a sort of abandonment of this view that really the government can’t take any kind of role in guiding the productive structure of the economy.
PERIES: And when you’re talking about these kinds of industries, give us some examples of what you exactly mean by that.
MICHELL: Well, the UK has a long tradition of high-tech industry, of innovative development, of coming up with new products and inventive products. But the recent policy orientation has been much more towards the service industry, towards financial services, and so on. We’ve suffered, for example, from a tendency to having a high exchange rate, which makes it hard for us to maintain competitive exports in the manufactured sector. And there’s a lot of opportunities, I think, coming up now with technology to overcome climate change, for example, that the UK could be at the forefront of if we had resources to invest in those technologies, to give business owners and entrepreneurs the chance to develop new technologies and invest.
PERIES: And Graham, from your point of view, what are some of the programs that could be put in place in order to reverse this trend of a wilting economy?
GUDGIN: Clearly there’s a deficiency of demand. We need more expenditure. Not only in the UK, actually. The deficiency is almost worldwide now. And if all countries would expand their spending, and that probably means government spending, because the government is always the spender of last resort, if the private sector can’t or won’t spend enough money to keep the economy growing fast enough, then governments have to.
In a sense it matters less what the government spends the money on than the fact that it, it spends the money at all. But in the UK, and I guess it would be the same in the U.S. and many countries, there’s quite a deficiency of infrastructure. We can spend more on roads, airports, ports, all sorts of things. This is a good time, really, to improve our infrastructure, to modernize our countries. Interest rates are very low. Government can borrow at low rates. They can do this cheaply.
And just as in the 1930s and in the New Deal, for instance, government expenditure got the, in that case, the U.S. economy out of a real hole, and we think that’s what the UK economy could be doing now.
PERIES: Graham, this is also the, the suggestion by many economists here in terms of needing a new deal here in the U.S. after the 2008-2009 economic crash. But, but this government didn’t really adhere to those values. It went in another direction, and what we have now is more of the financial sector growth and it making a rebound and more bubbles being created, like the one we had in 2007-2008 that led to the crash.
So–but you’re here as alternative economic thinkers. You’re thinking of more of a stimulus package to stimulate the economy. But how receptive is the current government to what you’re suggesting?
GUDGIN: Not receptive at all, in the case of the Conservative government. That’s the right-wing government that we have in the UK. It believes just the opposite, as do many governments in the euro area, on the continent of Europe as well. They believe instead in trying to cut debt. But this is a matter of shooting themselves in the foot. It’s like trying to run up a down escalator. It’s going against the flow. And the economics profession tends to advise them always to use monetary policy, lower interest rates, quantitative easing. But that, of course, has been done. We’ve tried all that, and it hasn’t been enough. The next step, now, is for somebody to spend some, some more money. As I say, the spender of last resort should be the government.
PERIES: Graham, so if the current government isn’t receptive to some of the suggestions you’re making here, do you think the Corbyn government would be receptive, and what kind of proposals are they considering?
GUDGIN: They haven’t made this proposal themselves yet. It’s early days, and they’re really trying to find their feet as a new government with a, a leader who finds himself in a, rather unexpectedly at the head of his party. But a reflationary policy, a policy of spending more government money, would be very much in line with the, the principles and outlook of [electing] a Labour government in the UK.
So we think it’s something they should do. It won’t be the government for another four and a half years, yet. But when we get to that point I think that the need for such a program will be even more obvious than it is today.
PERIES: And let me give you the last word. Do you think a potential Corbyn government would be more receptive to the kinds of proposals you have?
MICHELL: Absolutely. It’s clear already that the economic thinking coming out of Corbyn and his Shadow Chancellor, John McDonnell, is very different to what George Osborne is doing. They, for example, run a series of public lectures starting in the last couple of weeks where they’ve invited high-profile economists to give their view. And the most recent lecture, Mariana Mazzucato, the author of The Entrepreneurial State, gave her lecture explaining how the government could play a key role in driving forward innovation in industrial policy. It’s also clear they’re very much opposed to the austerity of the Osborne government. This is one of the key points made by Corbyn as part of his election campaign to the head of the labor party, so it’s very clear that they are in line with the kinds of suggestions that Graham and I are making today.
PERIES: All right, gentlemen. I thank you so much for joining us. Again, we will provide a link of the report just underneath this interview. And we look forward to having you back and dig further into some of the proposals you’re making.
GUDGIN: Thank you very much.
PERIES: And thank you for joining us on the Real News Network.
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