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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.