By Jeremy Williams
Looking at Britain’s economy back in January, I concluded that growth was seriously unlikely this year, and that it was entirely possible for Britain’s economy to go the way of Japan and hit a plateau. (To my mind, this is not necessarily a bad thing)
However, in a survey of 78 British economists, only one was brave enough to predict a double-dip recession. That was Andrew Simms of the new economics foundation, who is probably no longer alone in his analysis. Most economists were hoping for a modest rebound, the government for a more substantial one.
Others were willing to ask more difficult questions, and one of them is financial services company Tullett Prebon. They began to do a little research under the name ‘Project Armageddon’, a working title that they admit “certainly wasn’t intended for publication.” The purpose of the project was to investigate the possibility that both the government and the opposition are both right — that austerity measures were necessary, but that they would inevitably result in a period of flat growth.
Several months later, Dr Tim Morgan has released his findings, and you can download it as Thinking the Unthinkable — Might there be no way out for Britain?
“We conclude that Britain’s debts are unsupportable without sustained economic growth,” it says, “and that the economy, as currently configured, is aligned against growth.”
Britain’s debts are larger than generally reported, if you factor in private finance initiative obligations, pension commitments, and the cost of bailing out the banks. Altogether it comes to some £2.46 trillion, or 167% of GDP. Those are seriously precarious levels of exposure. Debt levels have to come down, and the only way those debts can be serviced is for the economy to grow.
The problem is, the economy can’t grow without further debt. The government’s deficit-reducing maths only works out if the economy returns to pre-crash levels of growth. Unfortunately, much of that pre-crash growth was fuelled by debt. If we can’t have more debt, we can’t have rapid growth. “The two big drivers of the economy have been private (mortgage and credit) borrowing, and huge (and debt-dependent) increases in public spending.”
To put a little detail around just how hard it is going to be to grow anything, consider that real estate, financial services and construction account for 39% of the British economy. Those cannot grow without debt, so they are, in the report’s words, “ex-growth”. Public spending on health, education, public administration and defence accounts for a further 19%. If government policy has put those decidedly into the ex-growth column, then a whole 58% of the economy can do nothing in response to those urgent demands for economic expansion. If you add retail, which is stalling as wages stagnate, that rises to 70% of the economy that is incapable of contributing to growth.
“Far from delivering strong growth, the UK economy is likely to do little better than mark time” says the report, and then adds “we believe that we may have been the first to have spotted it.” Not so, but they may be the first to detail it empirically.
What happens next? Well, “what happens next can only be bad” laments the report. House prices fall, unemployment levels will rise. If the markets get wind of the true state of the country’s finances, the speculators and credit rating agencies may come knocking. With the credit card maxed out, there’s no Keynesian cavalry to call upon. Interest rates can’t go any lower.
Morgan has no answers, other than to call for less regulation and simpler business taxation so that small and medium sized businesses can flourish. They also suggest that since it cannot guarantee its citizens a rising standard of living in material terms, the government should focus on a civil liberties agenda: “The scale of Britain’s underlying economic weaknesses is such that David Cameron and Nick Clegg cannot realistically expect to make Britain a richer country, but they can most certainly make it a freer one.”
That’s not a bad idea, but it doesn’t have to stop with civil liberties, it could be a whole re-ordering of the economy around qualitative rather than quantitative development.
There are two ways to see an end to growth. One is to see it as ‘stagnation’ or decline, and run ever faster to stand still. (The re-writing of Britain’s planning laws in the shameless service of economic growth would be one example.) The alternative is to accept that growth wasn’t delivering the goods in the first place, and learn to run the economy without it. After all, debt is one of several reasons why growth can’t be taken for granted any more. Climate change is one, oil depletion another. So perhaps we should embrace this new plateau not as stagnation, but as a levelling out, a stabilising and maturing of the economy.
That’s obviously a big change, and not one that would happen overnight. It would require a completely different set of political priorities and financial structures. It would need new lending mechanisms that don’t depend on usury, and debt forgiveness for those debts that are unpayable. Without the promise of growth to lift the poor, there would need to be a strong focus on equality. A shorter work week would create new jobs without growth, and would simultaneously open up the leisure time for that Big Society vision.
Steady-state economics has been a matter of theory for decades, but it isn’t any more. Britain may have already entered a post-growth state. The question now is how we respond — does it become chaotic scramble to stave off the decline, or do we look for ways to create prosperity without growth?
Find out more about the Post Growth Institute on our website.