Niall Oddy argues that the Coalition should not be distracted from their current path by lower than expected growth.
The publication of the latest quarterly growth figures for the UK economy by the Office of National Statistics was inevitably followed by a renewal of the debate over the government’s economic policy.
In response to growth of 0.2% Chancellor George Osborne was positive, insisting that Britain is ‘a safe haven in the storm’. Ed Balls, the Shadow Chancellor, was predictably negative, labelling the figure ‘very concerning’ and saying the Chancellor had ‘choked off the recovery’. Rumours abounds of disagreements over policy within the coalition government, including reports that David Cameron, worried by the low growth rate, had told Osborne to act now to stimulate growth. Boris Johnson, the Tory Mayor of London, urged the Chancellor to cut National Insurance and abolish the 50p rate of income tax.
All critiques of current economic policy, whether from the left or the right of the political spectrum, share a common theme: a lack of a long-term perspective. Once the growth figures were released the battle of rhetoric began – a battle for political advantage that was obsessed with responding to the growth figures and ignored the bigger picture.
In economic terms, the importance of quarterly growth figures is overstated – deliberately overstated for the purposes of political point-scoring. They only concern three months and are an estimate, often revised afterwards. It is the trend growth rate over a longer period of time that actually matters.
Policies that respond to the problem of a poor quarterly growth rate will have long-term consequences that must be weighed against any short-term benefits. A fiscal stimulus is a perfect example. Economic theory indicates that if the government pumps money into the economy than growth will be boosted, yet this would create further debt that will have to be paid in the future. It is such long-term consequences that Ed Balls chooses to ignore when he argues that the government is cutting spending too much in too short a period of time. The coalition’s policy of fiscal consolidation is in fact crucial.
Yes, growth is arguably slower now than it otherwise could be, but our economy will be in better shape in the future as a result. You only need to glance towards Europe at Greece, Ireland and Portugal to see the crises that can develop as a result of building up too much debt. The possibility of default by even the United States has been on the cards recently.
I do not know whether Balls genuinely believes that the short-term should take precedence over the long-term or he simply wants to score political points. He is thus either foolish or irresponsible, neither of which are particularly promising qualifications for a man who wants to take charge at the Treasury. By ignoring Balls and sticking to their convictions the UK government has steered us away from catastrophe by looking to the future
And there is reason to cheer at the economy’s short-term prospects. The latest figures confirm that the UK is growing, that the threat of a double-dip recession has gone. The Bank of England Monetary Policy Committee is continuing to ignore their inflation target and keep interest rates low, which stimulates spending by consumers and businesses.
The new economic order of heavy interventionism by the state that was born after the Second World War in Britain and other European countries created one affluent generation who had access to free university education and good pensions and so on. Such affluence was financed by debt that we – who have to pay for university and whose retirement prospects are in tatters – now have to pay off. The example of post-war Europe has thus been conclusive: government spending works for a limited time only. It is right to ignore Ed Balls’ flawed economics which would strangle the future for the sake of now, and give thought for economic costs in the long run. Thankfully, this is precisely what the coalition government is doing.