Doubling Dip: is it the government’s fault?

So, Britain is officially in a ”double-dip” recession, just. In reality this is both more and less serious than it sounds. It is more serious because we are still a good 4% of GDP lower than we were at the start of the financial crisis in 2007. And that is probably between 10% or more below where we would have been if not for the banking crisis.

It is less serious because we’re really bumping along at zero growth, plus or minus less than half a percent. But the real question is, can or could the Government do anything about it?

There are four, inter-related, reasons for this double-dip, three of which the government is partially or wholly responsible for and could do something about. They are:

– lack of consumer confidence depressing household demand;
– lack of business confidence depressing demand and investment;
– depressed public sector demand, especially investment;
– international, and especially European, economic conditions.

Let’s deal with the last of these first, as it’s the Government’s current favorite alibi. It is true that the European economy, in particular, is entering a troubled period again but it hasn’t been that bad for the past two years whereas Britain has almost flatlined for the whole period. The European, and some other parts, slowing down are likely to make our situation worse now than it already is, but it wasn’t the prime cause. Of course there is little the UK government can do about it, except make it’s contribution, via the IMF, to trying to stop things getting even worse. Labour may be right to criticize the Germans for not stepping up to help bailout faltering Eurozone governments, but there is little alternative to ensuring the IMF can if necessary mount a bailout, given the Germans won’t.

The issue of consumer and business lack of spending is a crucial one. Households are still preferring to pay down debt rather than spent, even when they can. Insecurity is crucial here, as it is for the businesses hanging on to a cash mountain equivalent to half of GDP (£750bn).herebthe government is at least partly to blame, and could do things to help. Hiking VAT didn’t exactly encourage spending, whilst cutting corporation tax doesn’t necessarily encourage investment. Targeted investment tax-breaks and a VAT reduction would help.

But what also seems to have happened here is that the Government, and especially the Chancellor, have helped to talk us into recession. The constant, exaggerated, cries of that we are the verge of becoming another Greece have taken their toll. People – households and businesses – have believed the rhetoric and are sensibly trying to hang onto their money in case things really do get that bad. And ironically they are helping to make to create just the situation they want to avoid.

Finally, public spending. Too far, too fast, cry Labour and to some extent they are right. But the cuts have been only about 20% implemented – there is much worse to come. The objective impact has hardly happened yet, but the symbolism has had, along with the prophecies of doom, the effect of undermining confidence. The, in some cases anticipatory, public sector jobs losses have made their contribution both psychologically and objectively, boosting unemployment and the generally gloomy mood.

Things are likely to get worse as the current public spending plans were predicated on growth that hasn’t happened. In Spending Review 2013 the demand for more and even bigger cuts will be based on both real economic and unreal ideological grounds. Debates are already erupting inside the coalition, with the Chancellor apparently planning a further £10bn raid on the welfare budget and Iain Duncan Smith resisting. Watch out for further skirmishes, possibly over health and definitely over international aid, both protected in the last Spending Review.

So, public spending and undermined household and business confidence resulting in a crash in demand and investment are probably the immediate causes of our bumping along the bottom. Both further spending cuts and a gloomy international prospect could make this even worse. To mark the government’s report ”could do better” would be an understatement. They could hardly have done any worse if they’d tried.

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