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Austerity vs. investment James Meadway Senior economist New - - PowerPoint PPT Presentation
Austerity vs. investment James Meadway Senior economist New - - PowerPoint PPT Presentation
Austerity vs. investment James Meadway Senior economist New Economics Foundation Current UK situation Double dip recession Two consecutive quarters of negative growth Further decline in manufacturing output Long-term unemployment
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Last five UK recessions
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Long-term trends
Median real incomes stagnant or falling
– Forecast to fall 7% this year
Inequality increasing over three decades
– Fastest rate of increase in OECD group of developed countries
Productivity growth is weak
– Gap with US, France and Germany is widening
Public sector responsible for 56% of jobs created since c.1980
– Manufacturing employment fallen 4m – Not replaced by private sector work
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Austerity and stagnation
Austerity lesson known since 1930s
– One person’s spending is another’s income: the multiplier effect – If nobody spends, nobody sells
Evidence across Europe is compelling
– Greece, Spain, Ireland, Portugal…
Driver for UK recession is collapse in spending
– Households retrench, business sit on cash – Exports do not recover: depreciation has not closed trade deficit – …and then government also attempts to cut
Worst single policy to follow is austerity
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Prospects for recovery
Essentially nonexistent in the short-term
– Short of miracle, will not happen while austerity is in place
Legacy of low investment by businesses over decades
– c.16% GDP, 1979-2009, below comparator countries
Infrastructure is chronically poor
– Dieter Helm estimate: £500bn needed over 10 years to meet comparable Western European standards
70% GDP in low-growth sectors (Tim Morgan, 2011) …but is government a problem?
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UK government taxes and revenues, 1979-2010
100 200 300 400 500 600 700 800 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 £bn Taxes Spending
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UK national debt, 1692-2010
50 100 150 200 250 300 1692 1712 1732 1752 1772 1792 1812 1832 1852 1872 1892 1912 1932 1952 1972 1992 %GDP
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Taxation and public spending, 1978-2010
30.0 40.0 50.0 %GDP Spending Taxes
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Current aggregate taxation not excessive
Total tax burden comparable to developed nations
– OECD average, 2008: 34.4% GDP – UK, 2008: 38.6% GDP
- Down from 40.4%, 1979-1997
– Corporation Tax at 22%...
- 18% lower than the US; 16% lower than Japan; 8% lower than Germany
But the burden is not distributed fairly
– Evasion estimated at £70bn a year – Bottom fifth households pay c.40% income in tax – Top fifth households pay c.35% income tax
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Cannot rely on private sector growth alone
UK’s cumulative problems are huge But a simple retreat of government is unlikely to work
– Estimate 600,000 government jobs to go… – …but private sector is historically poor at creating employment
“Rebalancing” is not happening
– Inequality rising – Manufacturing currently falling
Scale of change needed is immense
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The burden of debt
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No return to old growth model
“Growth” of previous decade did not deliver Rises in GDP did not turn into rising real median incomes Expansion of finance attempts to compensate
– Consumer borrowing – Growth of the City of London
Physical and environmental impacts
– Rising commodity prices – Climate change
But private sector alone unlikely to deliver change… … and nor can government continue as before
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Transfer payments as share of UK government spending, 1978-2010
20% 25% 30% 35% 40% 45%
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Public action can take a lead
More intelligent spending needed
– Tax-and-transfer not enough – Implicit guarantees for finance must go
Scale of challenge requires direct intervention and industrial policy
– East Asia, Finland – Direct role for government in driving innovation – Implicit UK industrial policy in pharmaceuticals, aerospace
Alongside transformation of finance…
– …and related efforts to reduce inequality
…and actions to reduce environmental impact
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