Seven leading economists on what chancellor George Osborne should do to revive the ailing UK ecomomy
It all seems so long ago. Barack Obama was a senator from Illinois running for the White House. Sven-Göran Eriksson was the manager of mid-table Manchester City. Harry Potter And The Deathly Hallows, the seventh and last in the series, was published. That was the world in the summer of 2007 as the UK entered a financial and economic crisis from which it has yet to recover.
Famine has followed feast. In the years leading up to the crash, the banks took bigger and bigger bets and consumers borrowed against the rising value of their homes. Growth averaged 3% a year between 2001 and 2007 – a time of leveraged buyouts, of private equity deals, and of an anything-goes culture in the City.
The years since have seen the biggest fall in output since the second world war, a short-lived and modest recovery, and a relapse. The double-dip recession Britain has been enduring since last autumn is only the second since modern records began and, unless things improve, it will take until 2014 or 2015 for the economy to get back to where it was before the recession started in early 2008.
There is little expectation that they will. Britain’s economic weaknesses – too much reliance on debt-driven growth, too big a financial sector, too narrow an industrial base – were papered over during the good years but have subsequently been exposed as banks have turned off the credit tap and consumers have been either unwilling or unable to borrow.
The worst of the crisis came in the 19-month period between the run on Northern Rock in September 2007 and the G20 summit held in London in April 2009. Gordon Brown’s Labour government part-nationalised Royal Bank of Scotland and Lloyds, and allowed public borrowing to rise in the hope that tax cuts and spending on the infrastructure would put a floor under the economy. The Bank of England cut interest rates to 0.5%, the lowest in its history, and cranked up the electronic printing presses.
To little real effect. In 2009, the economy contracted and by the time the coalition government came to power in May 2010, the budget deficit had risen to the highest it had ever been in peacetime. George Osborne, the new chancellor, said it was time for the government to do what businesses and consumers had been doing: tighten its belt.
Osborne’s plan was that the economy would become less dependent on consumer spending and the state for its growth. Instead, low interest rates, a weak pound and action to tackle the deficit would encourage companies to invest and export. Things have not gone according to plan. Consumers, hurt by high inflation, have been reluctant to spend and Whitehall cutbacks have started to bite. But the debt crisis in the eurozone, coupled with a sluggish global economy, have made exporting difficult, while businesses have mothballed investment projects until growth starts to recover. All four of the elements that make up growth – consumer spending, government spending, investment and exports – are struggling, which is why the economy is going nowhere fast. George Osborne has been insistent that there is no plan B. But should there be? And if so, what should it look like? Here, seven leading economists give him their ideas. Larry Elliott
The good news is, you’re not part of the euro. So my first piece of advice would be, don’t join! And second, call off the mad austerity. No large economy has ever recovered from a downturn as a result of austerity. It is a certain recipe for exacerbating the recession and inflicting unnecessary pain on the economy.
Any additional spending should address the longer term problems – inequality and industrial restructuring – and target the most needy in society who, because of the downturn, are suffering the most. A more progressive tax structure – higher taxes at the top, lower taxes at the bottom – would stimulate the economy. Taxing the excessive speculation that goes on in the financial sector would also be a good thing.
There’s a basic economic principle called the balance budget multiplier. If the government simultaneously raises taxes and raises spending, by the same amount, it stimulates the economy and creates jobs. Instead, both the US and the UK have embarked on a policy of austerity, but at least Obama realised he needed a larger stimulus and has been pushing for it. The Conservatives have taken the other stance, and it hasn’t worked out.
Joseph Stiglitz is Professor of Economics at Columbia University and author of The Price Of Inequality (Allen Lane).
The answer is: start over. The UK is basically the same as the US. You’ve got a private sector that got too far into debt, everyone’s trying to pay it down at the same time, and the government needs to be going in the other direction, not adding to that. Undo that austerity. You can currently borrow at real rates that are essentially zero, so this is a good time to be increasing public investment.
The UK is fairly unique, it having gratuitously chosen to pursue austerity. The eurozone countries have little alternative, but Cameron really didn’t have to do this. So my message to you is: do the opposite of what you’ve been doing for the last two years. The credit ratings don’t matter at all, so this argument about austerity keeping Britain’s triple A rating doesn’t make sense. This is a time for the UK government to be borrowing and spending. Boost the economy and give the private sector time to de-leverage. By all means lock in austerity for the medium to long run, but not now. If everyone tries to slash spending at the same time, that’s a recipe for what you’ve got: a depressed economy.
Paul Krugman is Professor of Economics at Princeton University and author of End This Depression Now! (WW Norton).
The government needs to appreciate its own position of strength – long-term borrowing rates are very low, the markets have accepted with hardly a murmur the delaying of plans to eliminate the government budget deficit by a couple of years already. In the meantime, there is a golden opportunity to borrow and spend on housing; on roads and rail upgrades, not HS2; to signal a willingness to allow airport capacity expansion (at Heathrow and Gatwick), which will be paid for by the private sector; and during all this remain resolutely pro-business but not pro-excessive rewards that create perverse incentives and inequality. Tax and spending incentives must be aligned with a constant eye to the long-term competitiveness of the British economy, but also what might work in the short term – for example, capital allowances, some temporary tax cuts, extra help to small- and medium-sized firms. In other words, develop an industrial strategy for the UK and start implementing it immediately.
Vicky Pryce is a City economist and former joint head of the Government Economic Service.
There is no miracle cure. Instead of taking a year to recover, as after a typical recession, full recovery after a financial crisis can easily take another decade or more. There is no shortage of polemicists who argue that the UK should run even larger deficits in view of today’s extraordinarily low short-term interest rates. This is classic short-term thinking.
All the advanced countries, including the UK, could probably benefit from having higher inflation for a few years. This would help facilitate downward adjustment in the real (inflation adjusted) value of wages and houses, and also achieve a modest deleveraging of public- and private-sector debt. But the best way to deal with a long-term problem is through long-term growth-enhancing structural reforms. For example, revitalising Britain’s infrastructure. Along with improving primary and secondary education, the UK would do well to ask what bottlenecks might be preventing faster growth in technology and biotech firms surrounding the UK’s world-class university systems. Most British banks are currently forced to pay a premium for funds, which is in turn affecting lending rates to businesses, so more aggressive recapitalisation of the banking system to promote greater competition might help ease lending conditions, and promote investment.
There is no quick Keynesian fix. A short-term strategy that neglects the long-term fundamentals is not what Britain needs right now.
Kenneth Rogoff is Professor of Economics at Harvard University.
Cutting public spending when there is no other source of growth in the economy is a sure-fire strategy for recession. As if the lack of recovery wasn’t bad enough, the lack of growth also scuppers your deficit-reduction goals – the very reason for austerity in the first place. Like throwing away the engine to trim a car, you have offset the lack of revenue recovery by slashing capital spending. The results are already being seen in the forecasts: there will be no spurt of growth to regain the losses of the recession. The best we can hope for is a slow crawl along the bottom.
Is there a way out? Initiatives such as the National Infrastructure Plan and the Green Investment Bank aim to mobilise private money behind growth-boosting capital projects, but they lack the financial backing to have a real impact. The government has promised less than £10bn, a fraction of the size of the cuts to public investment. Why not more? Since well-chosen infrastructure and energy-saving projects will be revenue-generating, increasing capital spending does not even have to come at the expense of a higher deficit.
With a chancellor who believes that budgets can be balanced by cutting expenditure without simultaneously boosting demand, we are stuck in a vicious cycle. Unless there is an immediate change of course, your legacy will stare at us in the form of downward-sloping graphs for a long time to come.
Robert Skidelsky is Professor of Political Economy at the University of Warwick and author of How Much Is Enough? (Allen Lane).
Even the International Monetary Fund thinks the government should loosen its belt! The focus has to be on restoring economic activity through increasing public spending. In the medium term, the focus has to shift from obsessing about GDP growth to improving the quality of life of all citizens, which may create quite different economic goals: generating good-quality employment; ensuring universal access to freely available and good-quality social services; reducing economic disparities and material vulnerabilities to get greater social cohesion; and providing ways of living that are less destructive of nature.
The good news is that this can be done – but it requires a different economic approach and possibly therefore different politics as well.
Jayati Ghosh is Professor of Economics, Jawaharlal Nehru University, New Delhi, India.
Debt created by private banks has been the force behind both the apparent prosperity of Britain during the Labour years, and the crisis you are now saddled with. This is because, just as an individual can finance his spending either from his income or via his credit card, a nation spends from either its income or the increase in its debt level. Rising debt reduces unemployment, while falling debt increases it – but of course this is a fool’s path to prosperity, because debt can’t forever rise faster than income.
You have inherited an economy that has followed that fool’s path, and is now deleveraging – and may do so for decades. In this environment, reducing public debt by running a government surplus accelerates the downturn. But the contrary policy – of simply running government deficits – isn’t ideal either. You also need to reduce the private debt directly, by what is best described as “Quantitative Easing for the Public”. This would give money to the public via their bank accounts, on the condition that those in debt must pay it down, while those without debt would get a cash injection. Debt would be directly reduced, benefiting everyone – except the banks, whose incomes would fall. That surely sounds like radical advice, but without a direct reduction in private debt, Britain faces as many lost decades as Japan has already endured – and without its export surplus to cushion the blow.
Steve Keen is Professor of Economics and Finance at the University of Western Sydney, and author of Debunking Economics (Zed Books).
• Inset images: Murdo Macleod; David Levene; Linda Nylind; Getty Images (2); James Croucher