In his annual budget speech yesterday, Chancellor George Osborne (the UK’s finance minister) declared that UK economy looks like to be in great shape, and that Britain is “walking tall again”. Jobs are being created, growth is on the up, living standards are improving, the national deficit (as a share of national income) has been halved, and ‘economic security’ is being prioritised.
Osborne has done a great job of spinning the statistics, and it can not be denied the economy is growing again. However, is this the type of growth Britain needs? Or does the current economic recovery mask a number of fundamental economic problems that could lead to yet another crisis?
A Debt Based Recovery
The Chancellor rightly pointed out that the UK has witnessed the fastest increase in GDP growth of all major economies. But what fuelled this recovery?
The Financial Times has noted that this can’t be explained by a growth in productivity. Indeed, productivity growth was stable for the 40 years before Chancellor Osborne came to power, and was ‘non-existent’ throughout his time as chancellor. This is hardly surprising: only 8% of the money created by banks goes to businesses to be invested in increasing their productive capacity.
Much was said about debt. According to the Chancellor, both private sector debt and national debt levels were soaring five years ago before he came to office. Apparently, both levels of debt are being reigned in and “The sun is starting to shine – and we are fixing the roof”.
It is spending or investment in the real economy that is required to fuel economic growth. Growth in spending or investment can be financed by running down savings or increasing household debt. Household savings have now fallen back down to levels seen just prior to the crisis, and business investment has been very low for the last half year. Indeed, much of the recovery has been fuelled by increases in debt.
The Office for Budget Responsibility, the public body responsible for economic forecasting, have forecasted that household debt levels will soon rise higher than their pre-crisis level. While mortgage lending has not reached pre-crisis levels, it is on the rise. More importantly, lending to households (excluding mortgages) is increasing at a rate £1-2 billion per month. With real incomes falling for the last six years, it is mainly household debt that is boosting the British economic recovery.
Here is the revision of ONS and OBR forecast of Household Debt to income rate – essentially predicting that it’s going to increase above crisis levels:
And what of national debt? The deficit (the amount the government borrows in one year) has fallen from £153 billion in 2009-2010 to £97.5 billion in 2013-2014. To a small extent this has been due to spending cuts, yet it has nothing to do with the increase in tax revenues that the Chancellor expected in 2010.
Assets & House Prices
Despite a small fall in house prices after 2008, the ever-growing housing bubble was never popped. Two of the biggest mortgage lenders suggested that house prices are now rising at the fastest rate since the crisis. The government perceives the value of property to be strongly linked with consumer spending, as well as increases in wealth and confidence, so they have created policies aimed at reflating house prices (such as the Help to Buy schemes).
Now households aged between 25-34 are being priced out of the housing market. Just 10 years ago, 60% of this age group owned their own property – while currently this figure crumbled to nearly 36%. Moreover, first-time buyers are twice as reliant on their parents for support for a deposit, compared to five years ago.
Jobs and Incomes
Since the coalition took office there are more people employed than ever before in Britain. Indeed, since 2008 the number of employed people has increased by about 1.1 million. Moreover, for the first time in six years real wages are apparently on the rise.
Yet the functioning and success of the labour market is somewhat more complex than the Chancellor suggests. For example, employment has increased mainly due to a massive increase in zero hour contracts and increases in self-employment (of the new jobs created since 2008, 732,000 were self-employed). Not only did the incomes of self-employed fall by 22% from 2012-2014, but around 80% of self-employed workers live in poverty.
Moreover, most of the increases in levels of employment were seen in the South of England- 10% since the Chancellor took office. On the other hand, while much was said about making return the North to a ‘Powerhouse’, spending on infrastructure in the North is £15 billion lower than when he took office.
Moreover, despite real wages showing somewhat of an increase in the last 6 months, this has very little to do with government policy and more to do with the low-levels of inflation (due to lower oil prices). Moreover, average real wages are still about 2% less than they were five years ago. Average real wages also masks the different income groups, where the top 10% have seen an increase in wages of 3.9%, while the other 90% have seen a decline of 2.4%.
A much better indicator, real median wages, shows that the earnings of most everyday Brits has been declining every year since 2008.
Considering the increases in prices of assets, low levels of productivity, higher levels of household debt, and declining real wages, it is hardly surprising that inequality is also on the rise. Indeed, evidence from the Social Market Foundation demonstrates that the wealth of the highest earners, the top 20%, has increased by 57% since 2005, whereas the wealth of the poorest 20% has declined by 46%. Other research, by the Centre for Analysis of Social Exclusion at LSE shows that the richest 10% have increased their wealth by 46.5% since 2008. Finally, the financial times has noted that inter-generational inequality has steeply risen since 2010, where “Older households are the only groups with higher living standards than they had in 2010 and the biggest losses have been among the young.”
Is this the Recovery Britain needs?
With higher levels of inequality, stagnant productivity, an ever-increasing current account deficit and declining real wages, Britain is relying on debt to fuel growth and increase assets prices. While the complexity of economics makes it impossible to predict when exactly there will be another crisis, it is well known that when debt levels rise faster than productivity and income levels, the economy becomes much more vulnerable to economic shocks. While Britain may be walking tall at the moment, it’s walking on thin ice.