Four simple steps to claw UK out of its longest recession
November 1, 2009
By Matthew Lynn
And yet the UK economy keeps on getting smaller. Last week, the government said gross domestic product (GDP) dropped 0.4 percent in the third quarter.
At this rate, even Iceland will pull out of recession before the UK does.
Prime Minister Gordon Brown keeps boasting he has the right policies to guide the country out of the woods. The truth is that they aren't working and they won't any time soon. Before it can recover, the UK needs a '-degree change in direction. It must curb the budget deficit, support the pound, stop printing money and cut taxes.
This is now the longest recession since records began in 1955.
There is no sign of life in manufacturing, nor much in retail or services. The pound edges closer to parity with the euro every week.
It isn't hard to figure out why. The UK economy was puffed up on a wave of borrowing and speculation. According to Goodbody Stockbrokers, UK households have debts worth 183 percent of disposable income. That is the highest of any major economy. Even the US is only on 134 percent.
The UK used to have a private debt problem. Now it has a private and a public debt problem. A collapse in tax revenue coupled with rising welfare bills to pay for the increase in unemployment has led to a widening gap between what the government receives and what it pays every month.
In September, it ran a £14.8 billion (R189bn) deficit. The half-year shortfall was the largest since records began in 1946, when the country still had the small matter of World War 2 to pay for.
So far, the response from the government and the Bank of England has been straight out of the economics textbooks.
Interest rates have been cut, the government has maintained spending and allowed the deficit to balloon, the pound has depreciated against the euro, and a programme of "quantitative easing" has pumped cash into the system.
The economy has been stimulated, stimulated and stimulated again.
It has failed to respond.
So what's the answer? Yet more stimulus? More debt? Printing more money? Devaluing the pound by another 30 percent?
There are plenty of people who would argue for all those.
And yet, as any doctor will tell you, when the patient doesn't respond to the treatment, it's time to change the medicine. In reality, the UK needs a total change of direction. It needs to do four things right away to get it back on the road to recovery.
First, stop printing money. There is no evidence to suggest the programme of quantitative easing has done anything other than reignite another bubble. Stocks are soaring, the banks are minting money, and the property market, which never had a chance to correct, is starting to fizz again.
Two, get the budget deficit under control. At more than 12.5 percent of GDP, the UK is running up debts at an unsustainable rate.
Three, support the pound. A modern, advanced nation can't devalue its way out of trouble.
Four, cut taxes for business. The UK used to be the low-cost destination in Europe. It has squandered that position, ceding ground to Ireland, Switzerland and just about everywhere else. Slashing corporate tax rates to match the 12.5 percent charged in Ireland would send a clear signal that Britain was a place to invest again.
The UK went into this recession in terrible structural shape. It was too reliant on banking and financial services, its competitiveness had slipped and it was building up too much debt.
Getting out was always going to be a long, painful slog. Its choice of a quick-fix artificial stimulus has not been working. - Bloomberg
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