Despite the welcome (and unexpected) rise in GDP in the last quarter, there is still no getting away from the fact that UK GDP has stagnated over 4 quarters, is still more than 3% below its level at the start of 2008, and is widely expected to slip back again over this winter and probably much of 2013.
Given 3 assumptions (1) it is agreed that the structural deficit needs to be reduced, but not too quickly because of the fragility of the economy, (2) this Tory government will (wrongly) not use a fiscal stimulus to kickstart the economy funded either by using QE for direct investment or by taxing the hyper-rich or by borrowing even at the historically unprecedentedly 0.5% rate, and (3) further fiscal austerity will be counter-productive because the fall in tax receipts through the absence of economic growth will exceed cuts in public expenditure, thus causing public debt to raise rather than fall, can a collapse into prolonged austerity still be avoided? Yes, it can.
At present the UK’s sectoral financial accounts reveal huge imbalances. The corporate sector is running a colossal surplus of 6.2% of GDP and the foreign sector a surplus of 1.7% of GDP. The household sector ran a huge deficit of 4.7% of GDP in 2007, but through widespread debt reduction since then now has a modest surplus. The public sector ended up running all the counterparty deficits.
The only way therefore to redress the deficit through the restoration of balance between the sectors – assuming that reviving a consumer credit bubble is ruled out since it would be a catastrophe – must be by tackling the corporate financial surpluses and reducing the structural current account deficits. This in turn must mean creating a boom respectively in investment and exports (or import substitution).
Generating a boom in investment demands several actions. One is to counter the current bonus culture which motivates managers to concentrate on short-term gains rather than investing in increasing long-term market share. Another is to bear down on these enormous corporate non-invested cash surpluses by fine-tuning taxation to encourage their deployment in agreed domestic industrial strategies like that just announced by Cable’s BIS to revive certain sectors within the textile industry.
Reversing the surplus for foreigners equally requires radical reform. The failed ‘funding for lending’ schme should be dropped since broad money (M4) loans to industry have contracted by 19% over the last 3 years since the banks have largely morphed into self-engrossed zombies still intent on leveraging for profit rather than serving industry.
They should be given equity targets and told they must not pay dividends or buy their shares until these tagets are met. And since the manufacturing net rate of return is merely 4.9% as against 15.8% for services, it is surely clear that the real exchange rate is greatly over-valued and should be lowered. Depreciation is a regulat concomitant of fiscal austerity, and since the UK is not strait-jacketed by the eurozone, it should seize this option.