Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
Yes, I only want to know about love … which brings me to the royal wedding today which seems to be dominating the media over here. So I am focusing on Britain today. The British monarchy has banned Australian comedians making any commentary on the wedding which seems to miss the point. I wish the couple well as I do all wedded couples – marriage is a great institution – but at the same time there’s something base about millions of public dollars going into this flippancy at the same time as the British government is undermining the prosperity of its own nation and committing millions to remain jobless and moving towards poverty. So here’s my royal wedding commentary which can be summarised by – I don’t wanna know about evil …
The title of-course is not mine. I recommend that David Cameron and George Osborne take a few days off and listen to the message in the fabulous song from John Martyn. Martyn is unfortunately no longer with us – enchanting us with his slurred vocals and beautiful guitar playing.
You might also like version from Dr John which is used in the closing credits from the great HBO show – True Blood – which puts the question of minorities in a very stark light. I recommend it.
Anyway, George, David, start thinking about love and stop the evil.
The British Office of National Statistics put out the latest National Accounts data this week which showed that Britain has virtually stopped growing.
The ONS said:
Gross Domestic Product (GDP) increased by 0.5 per cent in the first quarter of 2011, following a decrease of 0.5 per cent in the fourth quarter of 2010 … GDP is estimated now to have returned to the level in the third quarter of 2010.
The following graph is taken from the ONS time series data and shows the quarterly and annual percentage real GDP growth from March 2005. The colours are my tribute to the nuptials.
The graph tells a very stark story and for a government that was elected 12 months ago (about) who came to power promising growth and stability – the data to date suggests they have failed badly.
Anyway, I have been delving into the British Budget documents this week – to check on a few things. It makes sorry reading. Evil comes to mind.
If you read the official British Treasury documents from the Budget 2011 you will see a lot of reference to debt.
Under the heading “A strong and stable economy” (Page 7) you read:
… Over the pre-crisis decade, developments in the UK economy were driven by unsustainable levels of private sector debt and rising public sector debt. Indeed, it has been estimated that the UK became the most indebted country in the world … Households took on rising levels of mortgage debt to buy increasingly expensive housing, while by 2008 the debt of nonfinancial companies reached 110 per cent of GDP. Within the financial sector, the accumulation of debt was even greater. By 2007, the UK financial system had become the most highly leveraged of any major economy … This model of growth proved to be unsustainable …
This discussion is in the context of a vulnerable and unbalanced economy relying too much on private sector indebtedness for growth and being very sensitive to housing price movements.
I agree that a growth strategy that relies on the private sector increasingly funding its consumption spending via credit is unsustainable. Eventually the precariousness of the private balance sheets becomes the problem and households (and firms) then seek to reduce debt levels and that impacts negatively on aggregate demand (spending) which, in turn, stifles economic growth.
When those adjustments are stark – as they have been in the recent financial crisis – especially when housing prices collapse – the consequences are wide-ranging and very damaging. A recession induced by a private debt crisis is usually deeper and harder to resolve than a downturn arising in the real sector from, for example, a loss of consumer confidence.
When there are unsustainable stocks of private debt to deal with the adjustment becomes more complex.
But that is the only reference to household debt (or private debt) in the Budget documents. What follows is an obsessive coverage of the evils of public debt and the need to reduce it. The justification for the harsh austerity program which is now beginning to really eat into growth despite the rhetoric of the ideologues to the contrary is all tied up in the public debt arguments.
Soon after the only reference to private sector debt in the Budget 2011 Document you read that the “The Government’s economic policy objective is to achieve strong, sustainable and balanced growth that is more evenly shared across the country and between industries”
So as a person who understands the way national accounts work and the underlying economics that drive the data I can appreciate that you may succeed in a strategy of private sector debt reduction (given the Budget papers recognises it as a major problem) and public sector debt reduction (to satisfy the ideologues) while maintaining the sort of growth estimates that appear in the Budget under one condition.
The external sector has to come up trumps and provide the demand stimulus to the economy capable of (more than) offsetting the net saving desires of the private domestic sector and the fiscal drag coming from the public austerity program. If that doesn’t occur then the economy will shrink.
I explored this issue a bit further.
From Page 89 of the Budget paper (Section C) you can see the forward estimates which were prepared for the Government by the Office for Budget Responsibility (OBR). The OBR “was formed in May 2010 to make an independent assessment of the public finances and the economy, the public sector balance sheet and the long term sustainability of the public finances”. It is not an independent organisation at all – as it is stacked with neo-liberals who religiously believe in the mantras of fiscal consolidation etc.
Anyway in Annex C you can read “the OBR’s key projections for the economy and public finances”. The Budget Annex says that “(f)urther detail and explanation can be found in their report”. They might have added “IF YOU CAN FIND IT”.
But from Table C.1 you see very optimistic forecasts for Household consumption and net exports over the period 2011 to 2015. However, even if the net exports were to come in at forecast, the real GDP growth forecast would also requred the very strong recovery in household consumption that is forecast.
Interesting I thought, especially given that growth in Real household disposable income was forecast to be negative this year and then sluggish in the following years of the forecast horizon.
Are you guessing what I found out?
If you then consult some of the OBR papers you will come across this document (published April 21, 2011) – Household debt in the Economic and fiscal outlook.
You will read the following March 2011 household debt forecast which is the OBR input for the “household debt projection in the Economic and fiscal outlook” (that is, the Budget):
Our March forecast shows household debt rising from £1.6 trillion in 2011 to £2.1 trillion in 2015, or from 160 per cent of disposable income to 175 per cent. Essentially, this reflects our expectation that household consumption and investment will rise more quickly than household disposable income over this period. We forecast that income growth will be constrained by a relatively weak wage response to higher-than-expected inflation. But we expect households to seek to protect their standard of living, relative to their earlier expectations, so that growth in household spending is not as weak as growth in household income. This requires households to borrow throughout the forecast period.
The following Table is taken from the OBRs Table 1 and shows the forecasts for household assets and liabilities as a percentage of disposable income. It tells a particularly nasty story.
The OBR says that “net worth is forecast to decline as a percentage of income as the household debt ratio is expected to rise and the household assets ratio is expected to fall”.
So how are we to assess this?
Why is the British government making a fuss about the debt levels – both public and private – when its own growth strategy is contingent on the private sector taking on a rising debt burden over the forecast period and becoming relatively poorer?
Why isn’t that up-front in the Budget papers?
What the British government’s strategy amounts to is reducing public debt at the expense of more private debt. Prudent fiscal management requires that exactly the opposite is the case when the economy is floundering – given current conventions about matching budget deficits with public debt issuance.
It is totally unsustainable to create a growth strategy that relies on increased private sector indebtedness when that sector is already burdened by crippling levels of debt.
I see this “sleight of hand” – as a gross act of dishonesty from the British government. I am sure the public is not well informed about these issues given that all the rhetoric has been about reducing all debt.
The other obvious point, given this week’s first quarter 2011 National Accounts data is that the austerity strategy – the “fiscal contraction expansion” – is failing in a comprehensive way.
All the key economic indicators are poor in the UK at present. Let’s go through some of the data releases.
The ONS data for the Balance of Payments show that:
The UK current account recorded a deficit of £10.5 billion in the fourth quarter of 2010, increased from a revised deficit of £8.7 billion (originally published as a deficit of £9.6 billion) in the previous quarter. The fourth quarter balance is equivalent to -2.9 per cent of GDP, compared to -2.4 per cent in the previous quarter.
Conclusion: the much vaunted net exports boom which would ride in and save the British economy is missing in action. The BOPs are deteriorating not improving.
Data from the Bank of England – Trends in Lending – April 2011 – show that credit demand in Britain remains weak putting in doubt the OBR’s cynical optimism that in the face of harsh public spending cuts, British households will just substitute the lost disposable income with increased debt and happily go on consuming.
Business firms are also not borrowing which means that they are not investing. The BOE says “The stock of lending to UK businesses overall contracted in the three months to February, as did the stock of lending to small and medium-sized enterprises”.
This is despite continued low interest rates.
And of-course, the most recent – ONS Labour Force Statistics – (published April 11, 2011) shows that the unemployment rate is stuck around 7.8 per cent. It will not be stuck for too long. It will rise in the coming months as the impact of the slowing British economy takes its toll.
I don’t wanna know about evil ….
Everything is going south in the UK. Even the Irish who typically flee to Britain when times are tough are now flying straight to Australia to get work. That is a good indicator of how badly managed the recovery in Britain is at present.
Anyway, in the spirit of the title of today’s blog and the events that are occurring in London today, I advise you all to tune your guitars down (D-tuning) – put the capo on (fret four) and start strumming an Am! If you haven’t a guitar just sing along as all of us play the song and celebrate the royal wedding and wish that David and George were more fit to govern their nation. At least the wedding party doesn’t get to govern – fancy that.
Superman threatens to renounce US citizenship
The conservatives and right-wingers are in a blather about it. Advice: go suck!
I am starting to develop a FAQ guide to the blog – FAQ.
I am not going to spend a lot of time on it but will add to it slowly as another way of providing effective navigation to the blog which is now quite extensive.
If anyone wants to help me – by posing a common question and then finding key blogs in my archive where I deal with that issue specifically – your efforts would be appreciated. Just send me the data and I will post it in the FAQ page. I will acknowledge help.
The Saturday Quiz will be back sometime tomorrow – with even more labyrinthine linguistic layers (LLL) than last week!
That is enough for today!