This week-end has seen various economists claim there was no growth in the second quarter of 2011. The British Chambers of Commerce thinks export led manufacturing did well enough to ensure 0.3% growth for the second quarter.
I find it surprising that people are surprised that growth is slow. It all goes back to the misunderstanding about which sector, public or private, took the hit last year. If it had been cuts for the public sector and stimulus for the private sector, growth would have been higher. The private sector is still a lot bigger than the public sector, even after the years of large increases in public spending.
Instead, as readers of this site will know, the first Coalition year saw continued growth in overall public spending, along with substantial tax increases (imposed by both Labour and the Coalition governments) and a big surge in inflation. The continuing large fiscal stimulus did not work. We need a private sector stimulus, not more public spending. Constantly increasing public spending and borrowing can increase the squeeze on the private sector, as it is allied to present and future tax rises to pay for it all. The smaller increases in cash public spending in the later years of the strategy should be directed to the government’s spending priorities like health and education.
Wage growth remains very subdued. As a result of tax rises and inflation, consumers have been badly squeezed as forecast. The inflation was easy to forsee, as too much printed money depressed the value of the pound and led to a large increase in import prices. Now higher energy is doing the damage, partly designed by the policymakers as part of their drive to get us all to use less of it. This site called for anti inflation measures in 2009 including higher interest rates then to stop the pound’s fall. The authorities decided against. This site has also called for an energy policy which meets demand with more efficient and cheaper supply – we will return to this later this week. We need more cheaper energy if the manufacturing revival is to take wings, as manufacturing is energy intensive.
The government’s deficit reduction strategy relies heavily on tax revenue rises, which in turn depend heavily on accelerating growth. If the government is to hit these exacting targets in 2013-15 it needs to cut selective taxes and reduce the overall regulatory cost burden soon, to give some uplift to a struggling private sector. It can’t all be done by exports. If it doesn’t, it will end up borrowing even more than the £485 billion extra forecast for the 5 years. This will mean higher interest rates, a further depressant for enterprise.