Back when the UK emerged from recession in 2009, and again when the new Government was formed in 2010, politicians pinned their hopes for a robust recovery on the ‘rebalancing’ of the UK economy. In the run up to the crisis, growth was too fuelled by debt in both the household and public sectors, we were told. What we needed to do was rebalance the economy, so that exports and investment would drive us forward.
Three years after the recovery started, the jury is still out. In part, that reflects the fact that the official data on the drivers of GDP growth get revised an awful lot. In February, investment was thought to have contributed just 5% to the recovery since 2009. In March’s data revisions, that figure was been revised up to 19% (admittedly investment data are particularly volatile and subject to getting revamped). But with the level of investment still 19% below its pre-crisis peak even on the new data, we haven’t seen much rebalancing here.
The signs on trade – technically net exports – have been a bit more encouraging. After little immediate impact from sterling’s 25% decline in 2007/8, there were signs during the second half of 2011 that UK exporters were starting to bring more orders in. (This delayed response is consistent with the ‘pricing-to-market’ phenomenon that several economists were talking about even back in 2008). These data are bumpy and uncertain, too, but there were clearer signs of improvement. As recently as September last year, the overall monthly deficit stood at Â£4bn, but by December that had closed to just Â£1.7bn. Unfortunately, January’s figures were disappointing, and today’s data confirmed that the deficit was back to Â£3.4bn in February. That is only a little below the Â£3.5bn deficit seen in December 2007, before the banking crisis had really fed through to economic activity. In short, rebalancing still looks to be largely on hold.
In fact, even the starting premise for this was a bit flawed. Although it would have been far better to have run balanced budgets (or even small surpluses) from the millennium, public sector debt did not explode until 2008 when the recession hit. Pre-crisis fiscal deficits were small and broadly stable – they were barely a driver of growth at all. Meanwhile, as I have said many times before, the vast majority of debt in the household sector reflects mortgages and high house prices. Because that essentially represents an expansion on both sides of the balance sheet, it provides little if any impetus to consumption growth, beyond a new sofa or fridge when people move house. While the saving rate could have been higher, consumption was not really debt-fuelled at all, as a recent speech by MPC member Ben Broadbent pointed out.
It has been pointed out many times that, while households remain cautious, without stronger exports and investment the deficit reduction plan will hit growth. The key question that policymakers have yet to answer is what will spur this rebalancing on. Cutting the 50p tax rate is unlikely to have much impact (if any). Instead, politicians need to persuade businesses that the UK is a viable location for future business investment and development. This means producing school leavers and graduates that can compete on a global stage, and also providing the public infrastructure that business relies on. But it also means providing a clear steer on policy to reduce uncertainty – ultimately, finding ways to unlock the bundles of cash that (larger) UK companies are sitting on. The government needs to get these businesses investing in both economic capital and people if it really wants to see rebalancing.
Unfortunately, these things cost money. Maintaining – let alone improving – public infrastructure will be almost impossible given the cuts that have been forced through. And if tuition fees merely act as an alternative source of funding, rather than actually improving the quality of education provided, a graduate’s skill base will be little changed. Even cutting payroll taxes, to encourage employment, costs money.
There are those who say that, with the UK’s borrowing rates so low, the Government should just get on with it and spend more. I have some sympathy with this, although there is a fine balance to be struck – we cannot simply open the flood gates. An alternative option would be to keep cutting the deficit at the planned rate, but rebalance where those cuts fall. Ring fencing the NHS while cutting infrastructure spending by a third was a mistake. Other decisions were also overtly political. Rather than doing what would genuinely be in everyone’s best interest – which, for me, ultimately centres on enabling job creation – the Government’s political choices could ironically have held back the very rebalancing it was relying on. Time (and many data revisions) will eventually tell.