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An expert opinion poll
Is the British economy really on the road to recovery? We asked expert
witnesses from the media, academia and the City to sift the evidence and
give us their verdict. Interviews by Kate Lawrence and Kirsten Cale
Peter Jay
BBC Economics Editor
The prospects are dismal. The Gross Domestic Product gap - the gap between
the present level of output and a healthy level - is between three and seven
per cent of total output. That means if the economy grew at three per cent
a year for up to 10 years it still would barely get back to where we were
in the second half of 1990.
The consequence is that the GDP gap is getting wider, and more unemployment
is being pumped into the pipeline. It takes between one and four years,
if we judge by the eighties, for what has been put into the pipeline to
come out - therefore unemployment is likely to continue to rise for a number
of years. Even if it stops rising at some point, it will remain very high
and there is no prospect of any return to full or high employment in the
sense in which it was defined in the 1944 employment policy white paper and
understood for 30 years after the war.
There will quite soon be some tendency for spending and output to rise rather
than fall, but that is a very long way from anything that is properly defined
as economic recovery.
There are two basic goals of economic policy - one is to improve the long-term
rate of growth and the living standards that depend upon it and the other
is to achieve high employment. In terms of unemployment we are further away
from it now than we were in the 1980s. The 1980s and 1990s are worse than
the previous four decades and are comparable more with the 1930s, although
the absolute percentage level of unemployment is not as high.
In terms of the goal of increasing the annual rate of growth, the situation
is no different or slightly worse than it has been since the end of the
war. We probably just got to 3.5 per cent growth in the 1960s and since
then we have fallen back to 2.5 per cent - that means in absolute terms output
and living standards are higher than the 1930s - but then they are also higher
than 1066 and that's largely thanks to the advance of science! The purpose
is to speed up growth and that has not happened. The only supposed source
of comfort is that other economies supposed to be more dynamic than Britain
have slowed down too.
I don't believe economics has a definite answer. It does have a fairly definite
negative answer to some of the solutions you hear at the local pub. Some
things are not the problem - foreign competition, automation, the changing
size of the workforce, industrialisation. When you come to say what is the
key thing I don't believe at the moment we can do much better than surmise
that it has something to do with the relationship between skills and pay.
Either we are paying ourselves too much in relation to the skills we bring
to the labour market, or we are not bringing enough skills to the labour
market to justify what we think of as a decent or even modest standard of
living.
In the armchair, it is probably correct and relatively easy to say the key
thing is closing that gap - preferably by the route of raising skills rather
than lowering pay - but one way or other it has to be part of a strategy
for restoring high employment over the next 10 or 20 years.
Economic policy-makers have to be very humble - we have delivered ourselves
of decades of failure or at least culminating in failure. Clearly in terms
of our ability to achieve our employment goals in particular, we are going
backwards. In terms of higher growth we are not going backwards, but we
are continuing to fail to go forwards.
Will Hutton
Economics Editor, the Guardian
I think the economy is on the turn. It is recovering, although I don't like
the word 'recovery' because it suggests that there's something natural about
the recession. The recession was entirely induced by bad policy, and so
we are returning to the kind of condition which we might have been in had
there not been these man-made mistakes.
I don't accept this language of green shoots and spring and darling buds
of May, which suggests there was a long winter which was nothing to do with
the government; now spring is here and we can get back to the good times.
It suggests there is something structurally wrong with the economy which
is not my view. But, a two-and-a-half year recession is drawing to a close.
We've had the most amazing relaxation of monetary policy. There's been nothing
like it this century. Interest rates have dropped from 10 to six per cent
at the same time as a 16 per cent devaluation. I can't think of a parallel
relaxation, even in the early thirties.
In macro terms government policy is not wildly off course any longer - apart
from locking in the devaluation so everyone was secure it was going to happen - and
I would be prepared to have some kind of additional public expenditure boost
of £3 billion or £4 billion.
Recessions don't go on for ever, not after this kind of relaxation in policy.
There's no doubt that the economy is on the turn. The question is whether
recovery is sustainable and where it will lead. My own view is that by the
end of next year we're going to find that the gains in inflation made over
the last two years were wholly due to the loss of output. Nothing structural
happened at all and we're going to see inflation right back at five, six,
seven per cent. How the government responds to that is a very interesting
matter.
I also think that the gains in output will be disappointing from a devaluation
of this size, so that by 1994 you're going to see a very big trade deficit - current
account deficits of £20 billion or more. So you're going to see very
big and barely financeable trade deficits, not much growth in output despite
the huge boost the economy has been given, and the whole thing dissolving
in higher inflation.
The huge debt overhang is the major difference between now and the 1930s.
Secondly we haven't got captive markets - the old Empire was a captive market
which helped us bounce off and out of recession in the thirties. We haven't
got that this time round.
So we have a very unfavourable world outlook, we have no captive markets,
we have consumers manacled by debt, we have an extraordinarily weak manufacturing
sector. Whilst there has been a major policy relaxation, which I think will
put a floor under the economy and prompt some kind of up-tick, it's going
to be very disappointing. So the new story in town is not to talk about
this endless recession, but how structurally weak the whole damn set-up
is.
Phil Murphy
Economics Editor, Living Marxism
Any statistical comparison with the recessions of the 1970s or the 1980s,
or even with the 1930s slump fails to do justice to how bad things are for
Britain today. The problem with the use of historical statistics is that
you are never comparing like with like. When you look at what makes up the
British economy today, it's not much more than an offshore financial centre
for the rest of the world and a manufacturing platform for a few foreign
capitalists.
In structural terms the productive base of the economy has been getting
weaker for a very long time. Look at manufacturing, the key sector for assessing
the prospects for any national economy. Not only is it smaller than ever,
but what remains is finding it difficult to survive in the world market. When
John Major declared in his interview with the Independent in March
that 'we are uniquely competitive in a way we have not been in my lifetime'
he was right, but in exactly the opposite sense to the one he intended:
British industry has never been as uncompetitive. As Lord Prior told the
House of Commons select committee on employment in the same week, 'manufacturing
industry is no longer there'.
This is a key factor explaining the secular rise in the trade deficit, so
that today, even when we're in recession and domestic demand is low, Britain
is importing more than it exports. And, as a recent Financial Times study
showed, even in Britain's supposedly strong sectors like pharmaceuticals
and chemicals, which are still in surplus, the pattern is for decline.
With the economy in such a state it is inconceivable that there could be
a sustained recovery. This would need to be driven by real productive investment,
but low profitability is too great a barrier for that. This is why the slump
will continue and mass unemployment is here to stay.
Output can stop falling - the recession is self-correcting in that sense - but
that won't establish the base for recovery. In fact any short-term upturn
that might happen is certain to compound Britain's balance of payments deficit,
and so will only emphasise how bad things are at the structural level.
The government has no solution to the slump, its policy vacuum is starker
than ever. Low interest rates can make the burden of past debt easier to
carry, but it won't encourage new investment when the profitability isn't
there. A lower pound won't be decisive either: for 20 years devaluation
and a declining trade balance have gone hand in hand. What the government
and employers will do is try to make us pay for the crisis with our jobs,
our wages, our living standards, our pensions, and with worse healthcare
and education. Unemployment is already three million in Britain, or four
million as it used to be measured. There seems little reason why it won't
edge upwards towards the five million mark.
Simon Ward
Senior UK Economist, Lombard Street Research
We are relatively optimistic. Since we came out of the ERM the authorities
have been able to cut interest rates substantially by historical standards,
and from a policy perspective we have the basis for economic recovery. The
problem this year is exports will be held back by recession in Europe. There
will be some recovery in output during the year but it is not likely to
be very dramatic. But next year I think things will be a lot more optimistic - the
European economy should start to recover and the full effect of interest
rate cuts here should start to be felt. So we are quite optimistic about
growth prospects next year - we're looking for one per cent this year and
over three per cent next.
This is the deepest recession since the war. We estimate the GDP gap is
between five and six per cent. In the early eighties recession the peak was
four per cent. But the overall position now is better than the eighties
particularly because of inflation. In that recession inflation was double
digit - now it's very low.
Now that interest rates are at a sensible level, the basis for recovery
is there. I don't think there's a lot for the government to do. The best
policy is to wait and see. I would favour some tightening of fiscal policy.
My advice to the government would be to do nothing except a little tax raising.
In the long term the growth rate of the economy will be determined by growth
in capital stock and availability of skilled labour. Our investment is relatively
low by international standards and our education system is not keeping pace
with the competition. I don't see it as government's role to boost investment - I
think the best thing it can do is create a stable environment for investment.
Bob Rowthorn
Professor of Economics, King's College, Cambridge University
There's no doubt that output is beginning to improve now, and exports have
been improved by devaluation. From that point of view, output recovery is
beginning. But the problem is unemployment. It is difficult to judge what
the long-term future of unemployment is. In the 1980s recovery, output rose
from 1981 to 1986 at about three per cent a year, and yet unemployment carried
on rising and only stabilised by about 1986. If we were to repeat that experience
even with quite a strong recovery in output, unemployment would rise to
four million.
Even with strong recovery 3.5m is quite an optimistic picture. And where
it might go afterwards is difficult to say. I would be very surprised if
on present trends unemployment was less than 2.5m by the end of the century.
One way to reduce unemployment is to get a more effective manufacturing
sector. The manufacturing sector is actually much better than it used to
be - I don't share the view that it's going down the drain, but it's too
small. What we need is a lot of investment in manufacturing.
The Thatcher period knocked out manufacturing sectors. Some of these were
redundant - it was brutally done but it was necessary. But others were swept
away which weren't out of date. The sectors that were left saw a massive
improvement in productivity - chemicals and electrical engineering did particularly
well. The problem today is we've got half the team - the players are not
bad but we need more. That's a depressing prospect, but one doesn't have
to despair, it's not a totally insoluble problem.
We also have a problem with unemployment because of the neglect of public
services and infrastructure. This can be financed by higher taxes or making
people pay for public services. You could tax benefits such as child benefits
and disability or reform the pension scheme so better off people don't get
pensions. I'm not in favour of that - but I do think taxes should be higher.
We need more public housing and the state could clearly encourage that.
There's a shortage of teachers and so on - when you add them up together
you are talking of three quarters of a million people. Taking them off the
dole and giving them work in the public sector for an extra, say, £10
000 a year would cost around £7.5 billion. It's quite a lot but not
gigantic if you consider what a huge social problem it is. You could increase
tax to cover this or make people pay for public services. I've got nothing
against road tolls for example.
In a capitalist economy you encourage investment by making it secure and
profitable. You need an economic regime which will guarantee some security
that the process will not be severely interrupted - which is why I am against
excessive economic stimulation at the moment, because we could just repeat
the late eighties experience where you zoom upwards and then come crashing
down. I would be in favour of tax incentives for manufacturing across the
board. A low pound is a good stimulus too.
The Americans managed to create so many jobs because they had very low productivity
growth, and the counterpart of that is very low wage growth. If you said
in Britain that real wages are not to rise for 10 years you would have a
lot of job creation - the counterpart of unemployment is rising pay for wages
in work. It is a great inequality in society that people who have got jobs
are getting better and better off.
Wynne Godley
Professor of Economics, King's College, Cambridge
Britain's economic problems are very serious. Things are worse than the
recession of the 1980s. But it's not so severe as the thirties, since the
unemployment percentage is not as high.
I'm not more optimistic, I would just say that today's recession is not
as deep as the worst of the Depression in the 1930s. Then there was a big
financial crash.
However, the position now is potentially more serious than the 1930s because
such an enormous improvement is required in the performance of industry.
Our industry is in a state of decline - it is failing to compete successfully
in world markets in some dynamic sense. Unless that improves on a very large
scale, the recession will get very much worse.
The prospects are moderate. Maybe more competitive exchange rates, policies
to improve industrial performance and so on would make a difference. I think
there will be a recovery in three or four years.
Michael Hughes
Chief Economist at top City firm BZW
The statistics make the present comparable with the 1930s. But the advantage
now is that we have the lessons of the thirties. To me the difference between
a recession and a depression is that a recession is self-correcting, a depression
needs a kickstart. The kickstart you had in the thirties was a fiscal one - that
isn't feasible now, you have to have a monetary one and you have to increase
the supply of risk capital.
The areas that are most in need of risk capital are small companies and
the property sector. We need a very low level of interest rates for quite
some time but also a tax policy which encourages the stock market. Never
has it been as important to have a buoyant stock market as it is now.
The key policy to turn the economy around would be an improvement in the
supply of credit. That can take two forms: one is to have a tax policy which
encourages risk-taking (lower interest rates and a change in taxation of
dividends for companies), and the second is to reduce government's demands
on the capital markets, providing more money to go into the corporate sector.
That requires a tightening of fiscal policy.
I think the recovery has started. The irony is if you look at average estimates
for Gross Domestic Product, the low point was the second quarter of 1991--two
years ago. But people don't view the last two years as a period of recovery.
That's mainly because domestic demand continued to fall until the fourth
quarter of last year - but that does look as if it was the low point. To
that end the recovery has started.
What's different is that the degree of job creation associated with recovery
will be less than in the past. So it is quite conceivable that unemployment
will continue to rise next year. If eight per cent unemployment is the norm,
we're on 11 per cent now, I don't see us going back to eight until later
this decade.
Charles Bean
Professor of Economics at the London School of Economics,
Deputy Director of the Centre for Economic Performance
It would be absolutely amazing if the cuts in interest rates coupled with
the fall in the exchange rate doesn't start feeding through to increased
activity. Even though consumption is still subdued partly because of rising
unemployment, it would be an astonishing break with the past if the depreciation
did not get things going somewhat. I am certain growth will start resuming
this year or next, although it will probably be a sluggish recovery right
through the next five years.
The problem in the medium term is how you manage the recovery. We have a
big balance of payments deficit despite the recession and also a budget deficit
which is not entirely cyclical. These have to be corrected, which basically
means some increase in taxes or cuts in government spending. It is also
important that as recovery starts, wages don't start growing again in an
attempt to recoup the devaluation which has raised import prices. In the
short term wages will be kept in check by unemployment. The question is
what will happen when unemployment starts falling, whether those inflationary
pressures will be kept in check when the economy recovers.
This recession is different from the 1979-81 recession in that it is the
natural consequence of the boom in 1989-90, when consumers over-borrowed
in the expectation that income growth would continue at high rates and that
was not fulfilled. It was inevitable there would be some slowdown - the government
compounded it by raising interest rates too much.
In terms of debt it has been a long-lasting recession. But our experience
is recessions don't go on for ever. By and large there are certain inherent
self-correcting forces in the economy. The reduction in interest rates and
fall in exchange rates should help to get things going again.
Reproduced from Living Marxism issue 54, April 1993
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