Christine Lagarde’s inspectors should see that Britain is crying out for investment, not more austerity
Dear IMF officials,
Don’t be blinded by a single ray of sunshine. Britain may have avoided a triple-dip recession, but all the other economic news is weak at best.
At the heart of the problem are the country’s ultra-conservative banks and building societies. Either they are short of funds or reluctant to lend to all but the most financially secure borrower. As Vince Cable put it yesterday, they are working on a “pawnbroker business model” demanding “heaps of collateral” that he likened to a gold watch.
The result is that few small and medium-sized businesses can access the cheap credit on offer from the Bank of England.
Homebuyers are in a similar fix. Some estate agents report that cash buyers make up almost 50% of the house purchases in recent months. Housebuilding remains at levels not seen since the 1920s.
As you pointed out on your visit last year, the Treasury has room for manoeuvre should it want to promote growth. The trouble is that all the fiscal loosening this year will just go to overstressed hospitals, a bigger pension bill and a school system coping with a baby boom. There was little extra in the last budget for investment.
Among the voices over here calling for a more cautious approach to austerity are the former City regulator Lord Turner, who warned yesterday that the slowdown caused by aggressive cuts could trigger a cycle of debt.
“I think the difficulty is that when the public debt levels go up in the crisis you feel you’ve got to get that under control
Report shows arts budget of less than 0.1% of public spending delivers four times that in contribution to GDP
Arts and culture delivers a significant return on relatively small levels of government spending and directly leads to at least £856m of spending by tourists in the UK, according to a new report seeking to analyse the value of the arts to the modern economy.
Analysis by the Centre for Economics and Business Research (CEBR) shows that the arts budget accounts for less than 0.1% of public spending, yet it makes up 0.4% of the nation’s GDP.
The report is published amid fears that the arts will take another big hit when George Osborne announces his spending review in June.
Maria Miller, the culture secretary, recently called for the economic case to be made for the arts, “to hammer home the value of culture to our economy”. She added: “In an age of austerity, when times are tough and money is tight, our focus must be on culture’s economic impact.”
The report, commissioned in November, helps to do that in unprecedented detail, showing that spending on the arts is far from a drain on public resources.
Alan Davey, chief executive of Arts Council England, which commissioned the research with the National Museum Directors’ Council, said he was gratified that the report quantified “what we have long understood – that culture plays a vital part in attracting tourism to the tune of £856m a year; that arts centres and activities transform our towns and cities and drive regeneration, making the choice to maintain investment in culture a forward thinking one for local authorities; and that the arts support the creative industries and improve their productivity.”
The report calculates that:
• The turnover of businesses in the arts and culture industry was £12.4bn in 2011. This in turn led to an estimated £5.9bn of gross value added (GVA) to the UK economy in the same year. (GVA is the value of the industry’s output minus the value of inputs used to produce it, including state subsidies.)
• The sector provides more than 110,000 jobs directly, about 0.45% of total employment in the UK. The figure becomes 260,300 jobs once the indirect impacts of arts and culture are added in.
• Living in an area with twice the average level of cultural density adds an average £26,817 to the value of a property.
The report says that public subsidy plays a vital role in encouraging creative innovation by “overcoming private-sector reluctance to invest in risky projects”. One example of that, quoted in the report, is the National Theatre’s War Horse, which even the original book’s author, Michael Morpurgo, had reservations about – but which has become a big moneyspinner.
Similarly, The Curious Incident of the Dog in the Night-Time, which dominated the Olivier theatre awards, could only have been created with public money. Its director, Marianne Elliott, said after receiving an award: “We took risks and thought we would fail and it is a testament to subsidised theatre that we were allowed to think we might fail.”
The report says there is much evidence to show that art and culture improves national productivity. “Engagement with arts and culture helps to develop people’s critical thinking, to cultivate creative problem solving and to communicate and express themselves effectively.”
Although consumer spending on the arts – its biggest income – increased between 2008 and 2010, it suffered a decline in 2011-12. The report warns: “It might be said that arts and culture is experiencing a pincer movement effect in the aftermath of the financial crisis: reduced consumer expenditure due to squeezed incomes, and reduced public spending.”
The report was welcomed by the investment banker John Studzinski, who chairs the east London arts organisation Create. “Everybody knows the enormous intangible benefits of the arts. What this report does is look at tangible benefits that economists and bureaucrats can now point to.”
Davey stressed that the primary concern from the Arts Council’s perspective was always the contribution culture makes to quality of life. “But at a time when public finances are under such pressure, it is also right to examine all the benefits that investment in arts and culture can bring – and to consider how much we can make the most effective use of that contribution.”
Past five years appear to be a dress rehearsal for future: smaller economy, falling living standards, austerity and fed up voters
Since the start of the crisis five years ago, mainstream economics has been waiting for life to return to normal. Whatever ideological differences they might have, Keynesians and monetarists share a faith that all it takes is time and the right policies to bring back the good times. What unites them is the belief that the tough time the world has been going through since the summer of 2007 is an aberration.
But what if it isn’t? What if – in the memorable phrase of Tony Crosland when the wheels came off the economy in the mid-1970s – the party’s over? What if the 25% share of the vote taken by Ukip at last week’s local elections is not just a here today, gone tomorrow protest, but a sign of the political disaffection to come?
Should that prove to be the case, it will necessitate a complete re-think of political economy, since the model of the past 70 years has relied on decent levels of growth providing the resources not just to raise personal consumption levels but also to allow the expansion of welfare provision.
There are three reasons why this might be an over-gloomy assessment. The first is that growth does at last seem to be picking up, even if slowly and unevenly. In the US, the housing market is on the mend and the financial system has been largely patched up. In Britain, demand for mortgages is rising, new car sales are robust and the forward-looking business surveys are looking stronger. Consumers seem to be fed up with being miserable and have started to spend a bit more.
The second reason why the dark clouds may eventually be banished is that this is not the first time people have predicted the end of growth and been proved wrong. You don’t need to go all the way back to Malthus for an example: in the 1970s, there were plenty of doomsters who said the limits to growth had been reached.
The final reason, linked to the second, is that every now and then a burst of technological innovation has come along to revitalise the western industrial model. It happened at the end of the 19th century with a wave of innovations that included the automobile, the aeroplane and the cinema, and there are those who think what’s happening in digital, biotechnology, robotics and energy will perform the same function over the next 10-15 years.
Let’s take these points in turn. It is certainly true that western economies – the eurozone apart – are enjoying some growth. It is also true that the emergency policy actions of late 2008 and early 2009 prevented a severe recession from turning into a rerun of the 1930s. But five years on these emergency measures are still in place. Not just that, they have been augmented over time and are now permanent features of macro-economic policy. We have become hooked on stimulus and this is not a healthy sign.
An alternative history of the past 40 years goes as follows. The growth pessimists were broadly right, but what they did not anticipate is that the west would find new, ingenious and often dangerous ways of keeping the show on the road: financial de-regulation, personal debt, globalisation, exploiting the environment. There are still a few tricks policymakers can turn, such as shale gas and quantitative easing, but essentially these are just new versions of the old tricks. The game is up.
Nor, if the American economist Robert Gordon is right, can we rely on the cavalry to arrive in the form of technological change. Gordon argues that the current wave of innovations will prove less growth rich than those of a century ago.
Stephen King, the chief economist at HSBC, says in his new book, When the Money Runs Out, that we should not take progress for granted and should instead be bracing ourselves for the end of western affluence. He says the stagnation is far from temporary and will reach crisis proportions before too long.
King paints a dystopian vision of the future in which nations recoil from globalisation and become more willing to fight over resources. Populations lose their faith in governments and in money that has been debased by attempts to revive growth.
You don’t need fully to buy into this argument to see that King might be on to something. In Britain, we have a set of economic assumptions: that the economy will expand by 2% or so a year; that rising house prices will provide owner-occupiers with a nest egg; that the nation is wealthy enough to spend more on the steadily increasing cost of health, education, pensions and care for its elderly citizens.
There would need to be a radical scaling back of expectations in the event that the trend rate of growth is no longer 2 to 2.5% a year but 1%. Some of the promises we have made ourselves about the future would look extravagant, even reckless. There would be hard choices to be made between higher taxes and pared-back provision of public services. There would be a struggle to secure the fruits of what little growth there was, which those with the sharpest elbows would win. Many people would be in the position of seeing their living standards drop year after year, and would be mightily unhappy as a result.
In reality, a dress rehearsal for this sort of world has been going on for the past five years. The economy is smaller now than it was in 2008; living standards have fallen sharply; austerity has been imposed and – as the support for Ukip shows – there is a great deal of disgruntlement about.
Received political wisdom is that David Cameron and the Conservatives have the most to lose from the rise of Ukip. That’s true if Nigel Farage is merely surfing a wave of Euroscepticism, but if he’s tapping into a deeper well of disquiet the political leader with the real headache is Ed Miliband.
Why? Because social democratic parties thrive in times of abundance and wither in times of dearth. A growing economy allows parties of the left to increase investment in public spending and to redistribute resources from rich to poor. When they preside over falling living standards and cuts in social provision, they get kicked out.
Many natural Labour supporters voted for Ukip last Thursday, even though the past three years under the coalition should have made the official opposition the receptacle for protest. Labour should have done much, much better. That it didn’t boils down to two things. The opposition is still blamed for the state of the economy when the crisis broke. More significantly, perhaps, Labour needs to show that the growth pessimists are wrong and that it has a plan for remedying the UK’s deep structural problems after the next election. As yet, it has not remotely done so.
• Stephen King: When the Money Runs Out; Yale University Press
George Osborne says Thursday’s growth figures are ‘an encouraging sign the economy is healing’
Markit household finance index slid lower in April, signalling household finances deteriorating faster than in March
Ahead of official figures on Thursday that will show whether the UK has slipped into a triple-dip recession comes a downbeat report into consumers’ finances.
British households felt worse off in April as they continued to struggle with rising prices and meagre pay growth, suggests a survey out on Monday from the financial information services company Markit.
Bringing a halt to what had been an improving trend so far this year, the Markit household finance index slid lower this month, signalling that household finances were deteriorating faster than in March.
The firm said the result largely reflected the combined effect of lower income and higher living costs for households.
“Triple dip or no triple dip, there has been little alleviation of the strain on households’ financial wellbeing so far this year. Moreover, with incomes failing to keep pace with living costs, household finance constraints are likely to act as a further drag on consumer spending over the months ahead,” said Markit’s senior economist Tim Moore.
In its first monthly fall this year, the household finance index dropped to 37.7, down from 39.3 in March and well below the 50-mark that separates improvement from deterioration. Four times as many households, or 32%, reported a worsening in their finances in April than those who saw an improvement.
Households were slightly less downbeat, however, about the outlook for the next 12 months. Economists are divided over whether official data on Thursday will show the UK economy shrank in the first quarter, marking a triple-dip recession. Capital Economics says the chances of a further drop in GDP are “pretty much 50/50″.
“Of course, whether the economy shrinks by a fraction or grows by a fraction is of little importance in the big picture. Barring a major surprise in this week’s GDP figures, the main point is that the recovery will still look depressingly dismal – especially now that the labour market is weakening,” said Vicky Redwood at Capital Economics.
Howard Archer, economist at IHS Global Insight, is forecasting marginal GDP growth of 0.1 to 0.2% but says the first quarter is hard to call.
“There is major uncertainty over the outlook given that March’s cold weather could have had a further dampening impact on economic activity after the snow in January took a toll,” he said.”It would be good for psychological/confidence reasons if the economy could dodge contraction in the first quarter and therefore avoid nasty and potentially damaging headlines about triple-dip recession.”
New development created a third of the increase in GDP between 1932 and 1934. Could we repeat the experience today?
In the early 1930s Britain recovered impressively from a double-dip recession which ended in 1932. In every year from 1933 to 1936, before rearmament could have made any difference, growth exceeded 4% per year. Growth was not driven by fiscal stimulus; indeed it blossomed at a time of fiscal consolidation. So what was the magic formula?
The main ingredient was the “cheap-money policy“. From the middle of 1932, short-term interest rates were reduced close to zero and monetary policy was expansionary enough to stop prices falling and sustain mild inflation in pursuit of a target, set by the chancellor, Neville Chamberlain, to return prices to the 1929 level. The approach was similar in many respects to “Abenomics” in today’s Japan.
How did the cheap-money policy stimulate the real economy? A very important channel was through development of new housing. The number of houses built by the private sector rose from 133,000 in 1931-32 to 293,000 in 1934-35 and 279,000 in 1935-36. Many of these dwellings are the famous 1930s semi-detacheds which proliferated around London and more generally across southern England.
These figures are way ahead of any other year since the second world war. The building of these houses directly contributed an additional £55m to economic activity by 1934, and multiplier effects from increased employment probably raised the total impact to £80m – or a third of the increase in GDP between 1932 and 1934.
House building reacted to the reduction in interest rates and also to the recognition by developers that construction costs had bottomed out; both of these stimuli resulted from the cheap money policy.
House building was responsive in the 1930s for two reasons. First, the supply of mortgage finance grew rapidly and became more affordable in an economy in which there had been no financial crisis that curtailed lending. Building society mortgage debt rose from £316m with 720,000 borrowers in 1930 to £636m with 1,392,000 borrowers in 1937 when about 18% of non-agricultural working-class households were buying or owned their own homes.
In these years, deposits fell in some cases to 5% and repayment terms were extended from around 20 to 25 or even 30 years, reducing weekly outgoings by 15%.
Second, houses were affordable to an increasing number of potential buyers: 85% of new houses sold for less than £750 (£45,000 in today’s money). Terraced houses in the London area could be bought for £395 in the mid-1930s when average earnings were about £165 per year. Houses were cheap because the supply of land for housing was very elastic, which in turn meant that there was no incentive for developers to sit on large land banks. Underpinning the availability of land for house-building was an almost complete absence of land-use planning restrictions which applied to only about 75,000 acres in 1932; the draconian provisions of the 1947 Town and Country Planning Act were still to come.
Could we repeat the 1930s experience today? It would be very difficult since both mortgage availability and planning rules are very different. Nevertheless, given that we build far fewer houses than are needed to cope with the number of extra households each year, it is desirable to increase the supply of new houses.
A 1930s-style house building boom would not only be a great boost to economic recovery but would also address real social need. The directions for reforms which could re-create 1930s conditions are clear enough but, sadly, politically too difficult.
Nicholas Crafts is professor of economics at the University of Warwick
This content is brought to you by Guardian Professional. Join the housing network for analysis, best practice and the latest job vacancies
The cold has been good for energy firms and blokes selling dodgy scarves on the market. For the rest of us, not so much
It’s cold. You may have noticed. We have just emerged from the coldest March since 1962 into an April showing few signs of improvement. The long winter has blighted our wildlife and livestock, harmed our health and sparked fears of a triple-dip recession. But a few people – woolly-hat sellers, for example – have had a frozen field day. Here are the long winter’s top winners and losers.
Energy suppliers Gas usage in March was around a third above the normal average, forcing wholesale prices up from 70p to 99p per therm. An epic win for gas suppliers if they can pass the costs on to us without sparking a riot.
Airlines Thousands of holidaymakers have opted to flee the cold with last-minute flights to sunnier climes. Heathrow welcomed 100,000 extra fliers over Easter and travel agents have reported demand for their hotter destinations up by 50% on last year. Experts predict a corresponding rise in the quantity of uploaded photographs of smug Easter holidaymakers, and a corresponding fall in the number of people who follow and/or like them.
Lazy shoppers Spring collections are gathering dust in shops, meaning that even the best new ranges are unlikely to sell out too soon.
Winter clothing Sales of leather gloves at M&S are up 250% and its thermal clothing range is up 781%, while sales of winter clothes at John Lewis are 12% up on last year. Blokes selling dodgy scarves at markets have probably also done quite well.
Hot drinks Mulled wine and hot chocolate are still tempting in April as we resort to using our own bodies as hot-water bottles.
Our health The norovirus is back and coughs, colds and other viruses are on the move. “The weather means that people huddle in confined places more,” explains GP Dr Kate Adams, “and that’s why things are more contagious. I’ve seen four or five people with viral illnesses this morning in my surgery and that’s unusual for April.”
Campsites Happy campers are few and far between as siteowners face dwindling numbers and mass cancellations.
The economy Insurers have estimated the cost of the cold weather at £473m a day. That’s enough to buy every person in the country five cheap hot chocolates every evening. Could be a vote-winner.
Animals Hibernating hedgehogs have overslept and are in danger of not waking up. Sheep and other livestock are fading away in the cold weather; 500 puffins are dead in Scotland and a 300-strong German flea circus has been entirely wiped out.
Gardens Sales at garden centres over Easter were down around 50% as gardeners gave up on trying to nurture anything but their own hopes of one day seeing the sun again.
Heavy snow may be crucial factor in whether economy expands or contracts in first three months of 2013
Fears that Britain is heading for an unprecedented triple-dip recession have intensified as economists warned that the severe weather gripping much of Britain threatened a second successive quarter of falling national output.
Just days after the chancellor predicted that the UK would narrowly avoid a second successive quarter of negative growth – the official definition of recession – experts warned that the combination of heavy snow and sub-zero temperatures might be a crucial factor in whether the economy expanded in the first three months of 2013.
Osborne has been hoping that a pick-up in the housing market and stronger consumer spending will be enough to eke out growth of 0.1% in the three months to March, avoiding “triple dip” headlines when the official figures are released late next month.
But amid reports of empty shopping malls, closed schools and factory shutdowns, analysts said the weather increased the chance that the fall in activity in the final three months of 2012 would be followed by another quarter of falling gross domestic product in early 2013 – thus satisfying the official definition of a recession.
Economists said the cold snap would affect takings at pubs and restaurants, while parents would have had to take time off work to look after their children when the schools were closed. Manufacturing firms were likely to be affected by disrupted supply chains.
Samuel Tombs, of Capital Economics, said that the disruption was likely to be smaller than in December 2010, when blizzards contributed to a 0.5% drop in quarterly output. “Nonetheless, given that most economic indicators suggest that the economy was barely growing at all before the latest bad weather struck, the snow could well be enough to cause GDP to fall for a second consecutive quarter.”
He added that experience showed that spending in the high street would be around 1% lower this month as a result of the temperature in March being 3C below the average for the time of year. The construction industry would also be affected, while blocked roads and cancelled trains would make it harder for people to get to work.
In the past, much of the output lost as a result of bad weather has been recouped in later months. But Tombs said news of a triple-dip downturn would “probably still depress consumer confidence and lead to more calls for the government to reassess its austere spending plans”.
The City is already braced for a weak growth figure following the halving to just 0.6% of the government’s growth forecast for 2013. Britain is currently experiencing the slowest recovery in the past 100 years, following the deep downturn of 2008-09 and a second, shallower recession in 2011-12. There has been no triple-dip recession since modern records began.
Growth in the first quarter of 2013 has already been disrupted by poor weather in January, although the strong data for retail sales in February suggests that parts of the economy quickly bounced back. Analysts said, however, that the timing of the latest weather disruption made it impossible for the reduction in output to be recouped in the current quarter.
Howard Archer, chief UK economist at IHS Global Insight, said: “Bad weather is always unwelcome news for the UK economy, and the latest bout is particularly bad timing as it is battling to avoid further contraction in the first quarter of 2013 and dodge a triple-dip recession. Just how much the economy is affected by the latest snow will obviously depend on how widespread it ends up being and how long difficult travelling conditions last.
“But the worry is with it looking touch and go whether the economy can avoid further contraction in the first quarter and hence formally suffer triple-dip recession, even a slight hit to activity from the bad weather could be the deciding factor that tips the balance towards a further drop in GDP.”