How much damage is this crisis going to do? If the downturn is contained to a loss of 5% of National Income as the government hopes, that means a loss of £1250 for every man, woman and child in their share of National Income, or £5000 for a family of four. We will feel grateful if that is the full extent of it!
Worse still, the economy is much damaged for the longer term. It has too big a banking sector which is unable to grow. The nationalised zombie banks are in no state to continue to expand and create more jobs. They represent a large chunk of our financial commitment, towering over the state and the National Income.
A bloated public sector which will have to be made less costly and more efficient represents too large a portion of our activity.
The national debt burden will be collosal. Paying interest and repaying the debt will take priority over creating more jobs and building more business, especially with Labour’s new penal taxes on talent and enterprise. The higher taxes on gains, income, pensions and small business will act as a deterrent to the able and enterprising to create the jobs and new ideas here.
An economy which supercharged the growth with debt will not longer be able to do that. Nor will it keep inviting in so many new workers through a wide open borders policy. Government will impose quotas and controls, whilst many will no longer want to come as there will not be the jobs available.
Near the top of the boom Brown’s Treasury told us by some miracle they had shifted the trend rate of growth up from the usual 2.5% the UK had acheived post war, to 2.75%. In the Economic Competitiveness Review we challenged this and produced a paper saying the true trend growth was below 2% now, taking into account the debt effect and the damage done to competitiveness by a range of their actions and inactions.
So what is the trend rate of growth?
Current Treasury figure 2.75%
Less lower population growth -0.4%
Less impact of larger inefficient public sector -0.2%
Less debt effect -0.3%
Less financial sector distortions and losses -0.3%
Less incentive effect of new taxes -0.2%
Possible new trend rate of growth after recession 1.35%
I will be doing some more work to develop this model. Every 1% off the growth rate means the average family of four being worse off by £1,000 a year for each year of the slower growth. The losses compound up to large numbers quite quickly, as every year adds another shortfall of an additional £1,000 in their share of National income.