the coalition and the economy
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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 - PowerPoint PPT PresentationTRANSCRIPT
The Coalition and the Economy
Professor Brian MorganUWIC
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
1998 2000 2002 2004 2006 2008 2010 2012 2014 201530
32
34
36
38
40
42
44
46
48
50
G%T%Huge Budget Deficit
Government Expenditure and Tax Revenue as % of GDP
The Fiscal Deficit in the UK
Budget Surplus
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 Growth1. 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) .2. 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. 3. Industrial production• Been a huge fall in investment expenditure.• Investment has not been a key driver of the recovery in the last 4 recessions
Effective Sterling Exchange Rate
60
65
70
75
80
85
90
95
100
105
110
Jun-
88
Jun-
89
Jun-
90
Jun-
91
Jun-
92
Jun-
93
Jun-
94
Jun-
95
Jun-
96
Jun-
97
Jun-
98
Jun-
99
Jun-
00
Jun-
01
Jun-
02
Jun-
03
Jun-
04
Jun-
05
Jun-
06
Jun-
07
Jun-
08
Jun-
09
Source Bank of England
Source: ONS
Months Since Recession Started
Labour market: evidence of labour market flexibility
UK - Employment Level during recessions
90.0
92.0
94.0
96.0
98.0
100.0
102.0
Months
Inde
x 1980s
1990s
Current
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
Wales
North East
Northern Ire
land
Yorkshire
and the Humber
West Midlands
North W
est
East Midlands
South W
est
East of E
ngland
Scotla
nd
South East
London
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
GVA per Capita 2008 [£]
GVA per Capita 2008 [£]
WALES
Source: UK Competitiveness Index 2010, www.cforic.org
74% of UK average
Business Density - VAT registrations per 1000 inhabitants (2009)
London 44.5South East 40.3Northern Ireland 39.8South West 38.9East of England 38.0East Midlands 33.4West Midlands 32.7North West 30.8Wales 30.7Yorkshire and the Humber 29.2Scotland 28.2North East 22.3
Source: UK Competitiveness Index 2010, www.cforic.org
Business Start-up rate per 10,000 inhabitants (2007)
London 54.6South East 38.5East of England 34.8South West 32.9East Midlands 30.1North West 30.1West Midlands 29.2Scotland 28.4Yorkshire and the Humber 28.1Northern Ireland 25.1Wales 22.9
North East 22.6Source: UK Competitiveness Index 2010, www.cforic.org
% of employment in Knowledge Based Occupations (2008)London 28.4South East 20.8East of England 17.6South West 16.2North West 16.0Scotland 15.1West Midlands 14.8East Midlands 14.7Yorkshire and the Humber 14.5Wales 12.7North East 12.5
Source: UK Competitiveness Index 2010, www.cforic.org
Output per Hour Worked (Index)2006 RANK 2007 RANK
London 131.4 1 129.7 1South East 105.5 2 104.7 2East of England 98.8 3 100.6 3Scotland 96.5 4 95.6 4South West 94.6 5 94.2 5East Midlands 93.4 6 92.3 6North West 90.8 7 92.2 7North East 89.9 8 91.2 8West Midlands 88.1 10 89.6 9Yorkshire and the Humber 89.7 9 89.2 10Wales 84.3 11 84.6 11Northern Ireland 82.9 12 84.1 12
Source: UK Competitiveness Index 2010, www.cforic.org
Source: Office for National Statistics, Labour Force Survey, Labour Market Statistics
% 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%
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
Regional UK Competitiveness Index 2010(UK=100)(Robert Huggins UWIC)
Implications
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.