Tory economic policy has encouraged a fall in productivity over five quarters: if that carries on, it means a structural crisis
Supporters of government economic policy, which includes the large majority of City economists, have begun to suggest that the recent snowfall may cause an unprecedented “triple-dip” recession. The problem with this idea is that GDP in the final quarter of 2012 will also have been very weak and may have contracted. That was long before the weather disruption.
The weakness of the economy has continuously disproved the misplaced optimism of both the government and the Office for Budget Responsibility. As the IMF has suggested, over-optimism has been caused by an underestimation of the effects of “austerity” policies throughout the western economies. Economic weakness is caused by the cuts in government spending.
The claim for current policy is that the reduction in government spending would lead the private sector to increase its own investment. George Osborne promised a “march of the makers” as a result. The result has been precisely the opposite. Although the economy as a whole has grown by a meagre 0.6% since the Tory-led coalition took office, industrial production has actually fallen by 5.3%: it is now back where it was in 1992, in the depth of the crisis during sterling’s membership of the exchange rate mechanism (ERM).
That, too, was a Tory policy billed as imposing a new discipline on the economy, to make it leaner, more efficient and more competitive. Infamously, the then Tory chancellor said of the policy “if it isn’t hurting, it isn’t working”. But both these policies also bear a remarkable similarity to those of a previous Tory government, when monetarism was in vogue.
In all cases, some combination of job losses, pay freezes, cuts in welfare entitlements and privatisations were adopted, even though the label for the policies was very different. The supposed justification for each of the policies varied. Monetarism was supposed to deal with inflation, an overvalued exchange rate in the ERM was supposed to boost competitiveness and now of course “austerity” is supposed to bring the deficit down.
The constant factor in each of these nominally different policies is an attempt to boost profits. This is to be achieved by driving down wages, cutting welfare entitlements to finance, cutting both higher income tax rates and corporation tax and privatising state-owned enterprises. All of these are being employed now, with Royal Mail currently on the auction block, with potentially disastrous consequences. Margaret Thatcher reduced the level of corporation tax to 35% while the current government intends to reduce it to 23%.
All of this is supposed to lead to an increase in the rate of business investment. But the internationally low rate of business investment in the British economy has actually fallen over the period. The fall in investment is now greater than the fall in GDP since the recession began. It is also supposed to lead to an increase in productivity. But the Official for National Statistics points out that there has been an unprecedented decline in productivity coming out of the recession.
This is much more serious even than the probability of another quarterly contraction in economic growth. Falling productivity will lower the long-term growth rate of the entire economy. At present it means that real living standards are falling even while there is an increase in hours worked.
The decline in productivity has taken place over the last five quarters. There is a point when a cyclical crisis becomes a structural one; when a quantitative problem becomes a qualitative one.
The slumps at the beginning of both the 1980s and the 1990s were induced by Tory policies to increase profits. They were severe and inflicted lasting damage on the economy in terms of trend growth but they were cyclical crises. The unprecedented fall in productivity is a qualitatively greater problem. Both the cyclical and potentially structural crisis of the British economy can only be rectified by a significant and sustained increase in the level of investment.
This poses a sharp question for the next government, which could well be Labour. In 1997 it did not tackle the long-term effects of Thatcherism but was able to coast on the currents of a cyclical recovery. That option may not be open in 2015. There is also a strong likelihood it will face a structural crisis, of low productivity and reduced trend growth. In its own history the sole reference point to tackle this is 1945. By British standards a very radical government will be needed to deal with the crisis.