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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