Budget 2013: Radical options for the UK economy

An unemployed youth walks through a street in Accrington, Lancashire

Is this really as good as it gets?

Or could there be a yet-to-be-tried miracle cure for our economic malaise?

We are currently in the longest depression – with the economy failing to recover to its previous peak level of output – since before the 1920s.

At 7.8% of the workforce, unemployment remains uncomfortably high five years after the financial crisis. And this figure masks an even grimmer reality in which many of those in work have had to accept lower pay, part-time work and temporary contracts as they and their employers struggle to make ends meet.

Average household incomes in the UK have suffered an unprecedented period of decline dating back to before the financial crisis, with poorer households hit hardest.

Chart showing UK post-War economic recoveriesThis is our worst economic performance in a very, very long time

Can’t spend, won’t spend

At the heart of our malaise is a massive overhang of debt left over from the property boom years, particularly the mortgages taken on by young families, commercial landlords and small businesses.

That debt built up in the decades before 2008, reaching five times our yearly economic output, and has not gone away since.

It has become an albatross around our collective necks.

Those with the debts – not least the government – are reining in their spending in order to get their finances back under control. These arethe “zombie” businesses and households who are struggling to stay afloat.

Unfortunately, those without any debts also have little incentive to increase their spending.

Why, for example, should big businesses,sitting on huge piles of cash, invest in more production when the demand for their existing output remains so tepid?

Why should the baby-boomers, who benefited most during the boom years when the value of their old family home rose and rose, increase their spending now when their children face such hard times, and when the annuity income many can expect from their pensions has fallen to an all-time low?

All of which brings us to the central problem: If nobody wants to spend more, then nobody will earn more.

And if nobody earns more, our debts will not go away, no matter how hard we try to economise. It is a vicious circle.

But before you reach for the happy pills, read on.

Because there are a number of novel ideas currently doing the rounds at the Bank of England and the Treasury for how the UK could break out of this circle:

  • Negative interest rates
  • Promising to stoke inflation
  • Helicopter money
  • Old-school public works schemes
  • A debt jubilee


Categories: Business

Tags: , , , , , , , , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: