Recent GDP and industrial figures have reinforced the view that growth is picking up pace rapidly. But is it a stable, sustainable recovery or a rapid dash for growth that will leave us on uneven footing?
Plagued by U-turns, slow growth and squeezes on wages, David Cameron has often been compared to Ted Heath. He was even compared to as such (in a less then complementary manner) by one Tory MP. There are certainly many parallels and if the government is not careful, there will soon be another: the Barber Boom. In 1970 Ted Heath was elected on a platform of radical economic liberalisation. In 1972, with an election looming, he U-turned in a spectacular turn of events that became known as the ‘Barber Boom’. Panicked by rising unemployment, Heath responded in Keynesian fashion. The catalyst for Heath’s reversal was supposedly a phone call from the then chief constable of Glasgow, David McNee, who claimed that he may be unable to maintain public order in Glasgow should the Upper Clyde Shipbuilders be closed.
Heath’s Chancellor, Anthony Barber, reacted with a tsunami of Keynesian stimulus, involving subsidising and nationalising of many the ‘lame-duck’ enterprises. Unperturbed by the growing £3.5 billion deficit, Barber sought further cuts to direct taxation and increases to spending on welfare, health and education. As Keynesian economists predicted, growth blossomed and unemployment plummeted. In the second quarter of 1972 was 2.6% and in the first quarter of 1973 was an astonishing 5.3%! It was an extraordinary recovery that far dwarfs our current one. And just as the opponents of Keynesianism had predicted, it didn’t last. As soon as the stimulus was withdrawn, as eventually it must, stagflation strangled the British recovery, culminating in the Winter of discontent.
This government has thankfully avoided the fiscal trap Barber fell into. Unfortunately, it has fallen into an almost identical one with monetary policy. Both the package of Quantitative Easing and policy of holding interest rates at 0.5% are the most extreme example of their sort in the Western world. Whilst the 0.8% growth this quarter is welcome, it should not come as a surprise. Nor should the growth generated by artificial monetary stimulus be as welcome as that generated by private enterprise. The result of Quantitative Easing has mostly been growth based on soaring asset prices, one of the reasons why production and manufacturing remains below 2010 levels, let alone pre-recession levels. In spite of this, the UK’s GDP has grown over £200 billion in real terms since 2010 and the FTSE 100 has recovered to its 2007 peak. Will it last forever? And if not, what will happen when the stimulus is withdrawn?
Nevertheless, for all the doom and gloom, there is still some evidence that this government is not the same as Heath’s. Most of the Cabinet cut their teeth in the Thatcher/Major years and will thus understand the necessity of supply side reform. Some policies, such as the Red Tape Challenge and cuts to Corporation Tax, show this understanding, though the Liberal Democrats and EU remain dead weights on the deregulation challenge. Moreover, whilst the Help to Buy policy will mostly likely stimulate house prices rather than new building, rising house prices are currently a distinctly London-centric phenomena. Outside of London and parts of the South East, house prices remain mostly flat.
With an election in just 18 months the government might have blown its opportunity to withdraw the monetary stimulus whilst putting in place the necessary supply side reform. The government should also be expending their political capital on Europe on aiding Merkel in reforming the EU rather than wasting it on posturing and threatening withdrawal. Nevertheless, it remains the case that that is what is needed and if the necessary reforms aren’t made, the Osborne may begin to look like Barber’s.