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15 August 2013

Unbalanced And Unsustainable – If Something Cannot Go On Forever, Then It Will Stop

By Jeremy Warner

If something cannot go on for ever, Herb Stein, one time economic adviser to President Richard Nixon, famously remarked, it will stop. Yet sometimes, it seems to take an awfully long time to grind to a halt.

Take Britain's unbalanced form of economic growth. If anything was going to kill this apparently unsustainable form of economic advancement off for good, you might have thought that the worst banking crisis in more than a hundred years would do it.

But no. To the extent that economic growth has returned to these shores, it looks very much like the old type – heavily dependent on consumption even though real incomes continue to be squeezed. Ergo, we are still eating into grossly inadequate savings rates, or taking on debt, in order to spend.

Nor is it just households. Despite all the austerity rhetoric, the public sector is continuing to spend approximately £100bn a year more than it takes in in tax receipts. Ann Pettifor of Prime Economics has come up with a great soundbite to describe our addiction to spending beyond our means – calling Britain an "Alice in Wongaland" economy (after the payday loan company Wonga). I wish I'd thought of that one.

In any case, all this hot weather has apparently gone to our heads, and we have again been spending like drunken sailors without a care for the consequences.

Another of Herb's observations was that "economists are very good at saying that something cannot go on forever, but not so good at saying when it will stop". This is especially the case when public policy is hell bent on trying to sustain what economists widely regard as the unsustainable – through help to buy, funding for lending, and so on.

But there is actually another possibility – that actually what's happening isn't as unsustainable as it seems. Britain's economy has long been highly dependent on consumption, so dependent in fact that you are really not going to see any kind of a significant economic recovery until consumption starts picking up again. The same is true of the housing market, which has long been a disproportionately large part of the UK economy.

One of the reasons – in fact the main reason – Britain has thus far trailed other major economies in economic recovery is that consumption has failed to come back after the shock of the banking crisis in the same way as it has elsewhere. Well now it appears to be, and the UK is therefore seeing relatively strong growth compared to others.

Of course, if this kind of unearned growth went on for a long time, then it would be a cause for some concern, but as a way of kick-starting the economy and getting it working properly again, this revival in consumption is an overwhelmingly positive development. But if there is still no evidence a year from now of it being backed up by higher business investment and improvements in net trade, then we do indeed need to start worrying.

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