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The recovery’s fading: so what should be the policy now?

The evidence that Osborne’s so-called recovery is fading is now too strong to ignore.The latest evidence released by the IPPR think-tank finds that two-fifths of all new jobs since 2010 have been self-employment, oten at a pittance income – indeed the figures show that self-employment incomes have fallen by an average £2,000 since May 2010, a 14% drop even larger than the big 9% fall in regular employment over the same period. This is crucial for this reason. There are four, and only four, mechanisms that can drive demand and thence growth.

One is wages, including self-employment, and they are still falling; indeed the 3-monthly average for weekly earnings is now nearly 2% behind inflation. The second crucial factor is business investment and that is still lagging 10% behind the pre-2008 level because private investors are on strike – they don’t believe this recovery will be sustained. The third is net exports, the excess of exports over imports which now for traded goods is an unprecedented and disastrous negative: this year UK imports are likely to exceed UK manufactured exports by a staggering £115bn. And the fourth is government expenditure which Osborne’s continued obsession with austerity has thrown into reverse at least till 2020.

So everything about the government’s present stance on economic policy (and large parts of Labour’s economic policy too) are fundamentally wrong. First, the City, and parts of government too, are itching to increase interest rates. That would be a serious error since it will strengthen sterling which has already risen 10% over the past year and make it impossible to close the yawning trade gap, worsening the demand deficit even further. It will also plunge large numbers of those who have just scraped together enough to get on the home-owning ladder into negative equity, thus increasing household indebtedness which is already expected to reach £2.2 trillions by 2018 and shutting off another source of demand.

Second, the pound is being allowed to float up when everythin should be done in the Bank of England’s power to get and keep the pound down. This should be done by talking it down, setting lower target rates, including competitiveness as a key MPC criterion in setting rates, and printing money. But instead of QE being used to cosset the banks, it should be used to finance large-sclae public infrastructure projects, investing in transport and energy to accommodate the future green economy, and setting up big public housing projects on a proper paid-back contract basis.

Third, instead of government policy perversely being directed to reduce demand on all four counts, it should be boosted by every available means. A cheap money policy should be made explicit by public announcement, the banks should be penalised for not lending to industry on a significantly bigger scale, and a high growth target should be promulgated for monetary policy.


  1. Rod says:

    What should be the policy be now?

    Elect a Labour government for more Tory policies – you know it makes sense.

  2. Joy says:

    Even from a capitalist point of view current economic policy is damaging. For people to increase their profits there needs to be circulation of money. We are not even stagnating we are in a downward spiral while Government props up non productive companies in London and withdraws finance from manufacturing elsewhere. Consequently production and exports are dropping. Also due to much lower wages benefit bills are rising.

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