On the 20th March 2014 the British Chancellor of the Exchequer George Osborne announced his 2014 budget. Pointing to a set of figures that indicate economic recovery, Osborne could barely contain his glee as he goaded the Labour front bench with his apparently encouraging growth figures. This is not surprising given that hitherto, since the financial crisis of 2008, UK economic growth had looked pretty bleak. What little sign there was of recovery was, according to his political opponents, being strangled by the Chancellors draconian austerity measures.
If we cast our eyes back to the 2013 budget we can see a stark contrast. What a difference a year makes.
Back in March 2013 Osborne was forced to concede his recovery plan was “taking longer than anyone hoped”. He was forced into this admission because the UK economy appeared to be heading into a triple dip recession. Growth was stagnant and, despite using some creative accountancy, like delaying the international aid payments to improve the deficit figures, there was a clear threat that the UK’s credit rating would be further reduced.
Critic claimed that Osbornes austere fixation with reducing the £160 billion deficit through a drastic reduction in the public finances was effectively impoverishing the whole economy. This even led to warnings from the IMF that his policy was on the wrong track; “In the face of very weak private demand, it may be time to consider adjusting the original fiscal consolidation plan.” [Olivier Blanchard]
It is perhaps surprising then that only 12 months later the UK economic recovery seems to be well under way. Indeed figures show that it is the fastest growing economy within the G7 group of leading industrial nations.
Stirling has experienced an 11% rise over the last year and unemployment has fallen sharply whilst GDP has risen in equal measure. In addition house prices have continued to rise in some areas and growth projections now stand at 2.7%. This is 1.7% higher than the the Office for Budget Responsibility (OBR) predicted only 12 months ago.
So for a beleaguered Chancellor, who only a year previously was widely lambasted for his imposition of rising taxes and greatly reduced spending, it was clearly a smug pleasure to state in parliament that his critics “cannot explain why the UK recovery has strengthened rapidly”.
Unfortunately for Mr Osborne, whilst the opposition may not have been able to detract from his moment of glory, there is plenty of evidence to suggest that his bravado is utterly misplaced. Indeed there is such a gaping hole in his recovery figures that there is actually reason for significantly greater concern than their was 12 months ago.
12 months ago the OBR forecasts were that consumer spending and consumption would contribute to 0.6% growth with the remainder coming largely from business investment and exports. However what has actually happened is that consumerism has contributed more than double the amount that the OBR anticipated at 1.5%. Of greater concern is that projected export and business growth has been significantly less than expected.
Whilst Mr Osborne is politically motivated to take credit for the apparent recovery many economists point to another explanation for the rapid growth figures. They cite much lower commodity prices and a stabilisation of the Eurozone (which Osborne definitely had nothing to do with).
However whilst household spending that has been the single biggest contributor to the current growth figures average disposable income hasn’t increased at all. This begs the question where this extra spending is coming from. Clearly this is consumer spending fuelled by credit (in other words debt.) So growth would seem to be largely based upon consumer borrowing rather than spending and we all know where that leads.
But of far greater concern is the total stagnation of productivity in the UK economy. Generally speaking, prior to the economic crisis of 2008, productivity tended to grow 2% annually. However there has been, and continues to be, no growth at all in productivity. Therefore any growth can only come from people actually spending more than they earn. Debt in other words.
In fact, for the large majority of the UK public, the squeeze upon household budgets has increased significantly over the last 6 years. With an inevitable rise in interest rates upon the horizon a debt based economy is not a healthy one.
So what we have is increasing household debt, stagnation of wages, extremely worrying productivity and a consumer credit bubble fuelling growth predominantly in the financial sector.
Mr Osborne’s self congratulation is little more than hubris.