In a hole, keep digging – so says Osborne

This was supposed to be D-day. After half a year of stagnation today’s announcement of the second quarter economic figures was expected to herald Britain finally emerging from the worst recession for a century which started nearly 4 years ago. The 0.2% growth figure isn’t just a disappointment, it’s a wake-up call loud and clear for a change of course. The annual growth prediction for 2011 has now been downgraded for the fourth time to 1.3%. and the economy may struggle even to achieve that. That has to be compared with the German economy now roaring ahead and the French economy which is now growing confidently, though less fast than Germany’s. So what should now be done?

Cameron-Osborne’s non-response is No change. They point to the interruption in production caused by the Royal Wedding extra bank holiday, without which it is suggested the growth figure would have been 0.5% higher. But that is sheer fantasy, clutching at straws reminiscent of the snow-on-the-rails excuse for flat growth last winter. It’s a glib attempt to distract attention from what is overwhelmingly the obvious cause of the manufacturing collapse – inadequate demand.

The right response to this slowly unrolling scenario of prolonged stagnation would be some easing of fiscal policy to bolster demand. This need not necessarily be all that large. Even if the UK economy over the next 4 years (which is Osborne’s horizon) were to grow as little as 1.5% a year on average, that would still increase national income by £90bn, of which the Treasury take would be some £40bn. Since the Treasury calculates the structural deficit to be about £109bn, that would still leave nearly £70bn to be raised – even if it were to be accepted (which most economists do not) that the whole of it needs to be cut within 4 years. Even on that extreme assumption, half the remaining £70 bn could be raised by a (Tobin) Financial Activities Tax plus special levies targeted at the 1% super-rich whose wealth, according to the Sunday Times Rich List, has ballooned by over £300bn since 1997.

The remainder of the package could be financed, not by another round of quantitative easing which merely ends up boosting banks’ balance sheets rather than the economy, but by reversing the ill-advised hike in VAT (which would increase demand in the hands of those who would spend it by £13bn) and by launching a jobs and growth strategy geared at housebuilding, infrastructure renewal and the new green digital economy, funded by Growth Revival Bonds which would be likely to prove very popular.