Recession: If it looks like a duck
"All animals are equal, but some animals are more equal than others." George Orwell, Animal Farm.
Like a lugubrious wild boar who slovenly abhors the logical practice of adapting to your immediate surroundings in order to survive, George Osborne shuns the lessons of the Great Depression which John Maynard Keynes, the greatest economist of the last century, wrote tirelessly about. He is making the same mistake of taking demand out of the economy with his massive programme of cuts at a time when the economy was just starting to show positive signs of recovery.
The economic definition of a recession is two consecutive quarters of negative growth in the economy. A more interesting topic of debate is whether or not we are actually still in recession - text book definitions aside.
In November, the Bank of England (BOE) re-cast growth forecasts in the belief that growth will not reach 1% of GDP until the middle of 2012 and will not grow by 2% until 2013. When the last Labour government left office in the second quarter of 2010 growth was 1%. In Q3 of 2010 it fell to 0.7% and by the last quarter it was in negative territory at -0.5%. In Q1 of this year it was 0.5% and in Q2 0.1%. Each time these figures only matched or fell below expected growth figures.
Since George Osborne became Chancellor, economic growth forecasts have continually been recalculated downwards. He has blamed the weather and the Royal wedding, among other things. Now the great clarion call from the coalition is that the Euro Zone is the great obstacle to growth. It seems paradoxical that the Conservatives now seem to constantly blame the Euro's woes for British economic troubles, because they were so quick to castigate the last Labour government for doing the same. To a lesser and greater extent both are right, yet the facts of Britain's dwindling growth since Mr Obsorne took office cannot be ignored.
The Office for National Statistics (ONS) recently found that the Chancellor was on track to meet his targets, but at whose cost? What they have seemingly done is destabilise public services and made people fear for their jobs, the consequences of which have stalled the economy by facilitating a climate of unnecessary fear.
The venture capitalist Adrian Beecroft recently wrote a report for the coalition suggesting doubling the amount of time before an employee can file for unfair dismissal. This would only make people save what money they have, again hitting the recovery. Increasing the retirement age to 68 is also a blow to all British citizens.
Interest rates have been at a historic low of 0.5% since March 2009. This is good for homeowners as it keeps mortgage rates down, but it is very bad news for savers such as the elderly, who rely on the interest from savings for additional income. The result is that many people are having to dig into their savings to get by each month and have been doing so for some time.
The Purchasing Managers Index (PMI) is based on a monthly survey of company executives and covers manufacturing, construction and the services industry. David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said in September: "This eye-watering decline in this month's Services PMI figures shows the full impact of current weaknesses and instability in the wider economy." He went on to say that businesses in the southeast hope next year's Olympics will boost the PMI. The outlook for the country as a whole is less clear.
Inflation has been 5% or over for some time now and dropped to exactly 5% in November, with the BOE predicting it will fall to 2% by the middle of next year and 1% the year after. But real-term wage increases have been nowhere to be seen, with wages excluding bonuses rising by 1.7% in November year on year (source: ONS), well below inflation. What this means is that people will continue to struggle to pay for essentials like energy, fuel and food.
George Osborne had the audacity to claim that the VAT rise from 17.5% to 20% brought in at the start of January was 'progressive'. As the saying goes, if it looks like a duck, swims like a duck and quacks like a duck, then it probably is a duck. The poor are disproportionately hit hardest as they have by far the lowest incomes, so the rise was very much regressive. Nick Clegg and the Lib Dems campaigned against a VAT rise during the general election, while David Cameron said in 2009 that a rise in VAT would be 'clearly regressive'.
An Institute for Fiscal Studies report found the coalition's 2010 budget to be regressive. Single people of no income in the lowest twenty percentile will lose 7.2% of their incomes over this period, compared to 2.2% of the richest. Working single people will lose 4.2% and the wealthiest 2.8%, compared to the last Labour government, under which working single people would have lost 0.17% and the richest 1.96%. Families with children also stand to lose out under the coalition's plans in comparison to the last government's, with the poorest families with one, two or multifamily households facing higher tax rises or benefit cuts than their middle income or richest tax bracket counter parts.
Many Conservative politicians and writers alike seem to see the cuts as a way of bringing public spending down to 'normal' levels. Yet this argument is baseless if the cuts only serve to worsen the economy and propagate fear into the hearts of working people at a time when the recovery looks non-existent.
This all stems from the belief that the free market is all powerful; that if you reduce the role of the state, the market (as envisioned by Adam Smith's invisible hand) will flourish. But an economy cannot be run on blind faith. In reality it is much more of a Darwinian evolutionary system, in which predators hunt in packs and pick off the weakest. In a compassionate society, the veracity of such preternatural urges must be questioned. As a civilisation, we are all one and greed must have limits. Presently, it would appear that it is the poorest that are suffering the most.
The British economy exists in a self-perpetuating bubble. The Tories hope that the public will spend its way out of this slump, but in a vicious cycle of fear this seems unlikely to happen and will only be exacerbated by such policies.
The massive deregulation of the state that the coalition seems determined to implement flies in the face of what caused the financial crash in the first place - deregulation. Ripping up planning laws and eroding job security will not bring this country out of recession. It will worsen the economy, as the decline in GDP has shown. If the British economy was a piece of paper, these measures would simply tear away the corners.
What the economy truly needs is a radical vision like huge investment in a new green economy. As the world faces huge ecological obstacles, Britain could be a true leader in creating and forging a new economic vision for the world, driving manufacturing and creative industries alike and reducing the burden of the financial services sector (around 25-30% of GDP), which the neo-conservative/liberal axis of the past thirty years has been so enamoured with. Britain needs to be bold to face challenges that rise in the East, but repeating the failed economic measures of the past will not achieve this. )
