Transcript The Coalition and the Economy

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 ‘NICE’ Decade
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
50
48
46
44
42
40
Huge Budget Deficit
Budget Surplus
38
36
34
32
30
1998
2000
2002
2004
2006
2008
2010
2012
2014
2015
G%
T%
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
1.
•
•
2.
•
•
3.
•
•
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) .
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.
Industrial production
Been a huge fall in investment expenditure.
Investment has not been a key driver of the recovery in the last 4
recessions
Source Bank of England
Jun-09
Jun-08
Jun-07
Jun-06
Jun-05
Jun-04
Jun-03
Jun-02
Jun-01
Jun-00
Jun-99
Jun-98
Jun-97
Jun-96
Jun-95
Jun-94
Jun-93
Jun-92
Jun-91
Jun-90
Jun-89
Jun-88
Effective Sterling Exchange Rate
110
105
100
95
90
85
80
75
70
65
60
Labour market: evidence of labour market flexibility
UK - Employment Level during recessions
102.0
100.0
Current
Index
98.0
1980s
96.0
1990s
94.0
92.0
Months
Months Since Recession Started
Source: ONS
76
73
70
67
64
61
58
55
52
49
46
43
40
37
34
31
28
25
22
19
16
13
10
7
4
1
90.0
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
GVA per Capita 2008 [£]
35 000
30 000
25 000
74% of UK average
Wales
North East
Northern Ireland
20 000
Yorkshire and the Humber
West Midlands
15 000
North West
10 000
5 000
W
A
L
E
S
East Midlands
South West
East of England
Scotland
South East
London
0
Source: UK Competitiveness Index 2010, www.cforic.org
Business Density - VAT registrations per 1000 inhabitants (2009)
London
South East
Northern Ireland
South West
East of England
East Midlands
West Midlands
North West
Wales
Yorkshire and the Humber
Scotland
North East
Source: UK Competitiveness Index 2010, www.cforic.org
44.5
40.3
39.8
38.9
38.0
33.4
32.7
30.8
30.7
29.2
28.2
22.3
Business Start-up rate per 10,000 inhabitants (2007)
London
South East
East of England
South West
East Midlands
North West
West Midlands
Scotland
Yorkshire and the Humber
Northern Ireland
Wales
54.6
38.5
34.8
32.9
30.1
30.1
29.2
28.4
28.1
25.1
22.9
North East
22.6
Source: UK Competitiveness Index 2010, www.cforic.org
% of employment in Knowledge Based Occupations (2008)
London
28.4
South East
20.8
East of England
17.6
South West
16.2
North West
16.0
Scotland
15.1
West Midlands
14.8
East Midlands
14.7
Yorkshire and the Humber
14.5
Wales
12.7
North East
12.5
Source: UK Competitiveness Index 2010, www.cforic.org
Output per Hour Worked (Index)
2006
London
131.4
South East
105.5
East of England
98.8
Scotland
96.5
South West
94.6
East Midlands
93.4
North West
90.8
North East
89.9
West Midlands
88.1
Yorkshire and the Humber
89.7
Wales
84.3
Northern Ireland
82.9
RANK
1
2
3
4
5
6
7
8
10
9
11
12
Source: UK Competitiveness Index 2010, www.cforic.org
2007
129.7
104.7
100.6
95.6
94.2
92.3
92.2
91.2
89.6
89.2
84.6
84.1
RANK
1
2
3
4
5
6
7
8
9
10
11
12
% of employment in Public and Financial sectors (2010)
Public Sector Employment
Financial Sector Employment
Wales
25.3%
2.2%
North East
25.0%
2.5%
Scotland
24.5%
3.8%
Yorkshire and the Humber
22.5%
3.5%
North West
21.7%
3.0%
West Midlands
20.9%
3.2%
London
20.8%
9.3%
South West
20.4%
3.1%
East Midlands
18.2%
2.2%
South East
16.3%
3.0%
East of England
16.3%
2.6%
Source: Office for National Statistics, Labour Force
Survey, Labour Market Statistics
Weekly pay 2006 – Differential between top 10% public sector jobs
and top 10% in the private sector
United Kingdom
-7.60%
South East
-19.20%
Scotland
-5.80%
West Midlands
-0.10%
South West
2.00%
North West
3.30%
North East
4.40%
Wales
9.30%
Source: Annual Survey of Hours and Earnings
Implications
Regional UK Competitiveness Index 2010(UK=100)
(Robert Huggins UWIC)
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.