It is beginning to dawn on the Scottish and UK business community that the UK coalition government's austerity programme is not going to work. It is not going to work to get a recovery going to anywhere close to pre-recession trends. Nor is it likely to lead to a marked improvement in government borrowing and debt levels as yesterday's figures showed.
Business organisations want the government to do something. But they are caught in the trap of their earlier support for the austerity programme. So, some argue for austerity i.e. government spending cuts, but want more help for business, to boost confidence and 'supply-side' measures - see for example here. The Institute of Directors (IOD) particularly supports austerity, yet argues for tax cuts - for business of course - and other steps to reduce the costs of doing business such as less business regulation.
The IOD yesterday published a survey of its members on the prospects for growth in the British economy. Quite reasonably its members were not very sanguine. Its members also believed that the UK government's supply-side reform measures - including on taxation, regulation, education and infrastructure - were ineffective. But the IOD's Chief Economist Graeme Leach tried to link the flat lining economy and slow recovery to the weak pace of government supply-side reform:
Business is battening down the hatches in the expectation that the recession will continue for the rest of the year. .... Low confidence leads to delayed decisions, and delayed decisions further undermine economic confidence – it's a vicious cycle. At the same time, the Government's reform agenda is pointing in broadly the right direction, but the overwhelming opinion of our members is that they are doing too little, too slowly. If the Coalition wants to break this cycle of low economic confidence, then they need to take some bold steps that will make a real difference to the cost and complexity of doing business in the UK.
All of this is, quite frankly, nonsense. As is the government's view that our double-dip recession and lack of recovery from the first recession is due to the problems in the eurozone.
As I noted in this post, the current problem confronting the Scottish and rest of UK economies is not a lack of capacity, or inefficient use of supply, that might be remedied by "supply-side" measures. There is plenty of capacity, notwithstanding the possible large drop in productivity since the Great Recession. With unemployment at 8% and many shops, offices, factories, and machines idle, there is plenty of capacity.
What is required is to raise the utilisation of that capacity now and, yes, appropriate supply-side measures may help to raise the growth of supply potential for the future. But for now we need more demand in the economy to get capacity utilisation up.
Household spending accounts for around 60% of Scottish GVA or 40% of final demand. It is the principal component of demand. The following chart of Scottish household spending is drawn from recent data published by the Scottish government as part of its Scottish National Accounts Project (SNAP). The data run from the first quarter of 1998 to the first quarter of this year. The SNAP data are presented in current prices, so I have cast the data into real terms using a deflator for UK consumption spending from the ONS. The use of a UK deflator could distort the Scottish figures but I doubt if there would be much difference in the degree of price change in final consumption goods consumed north and south of the border. Readers should, nevertheless, bear this in mind.
What is clear from the figure is that Scottish household spending has been following a path which, to say the least, is significantly weaker than before the Great Recession. The trend since the 'recovery' began in the third quarter of 2009 can best be described as 'flat', with spending still nearly 7% below its pre-recession peak in the fourth quarter of 2007 and almost identical to the peak to trough drop in spending during the downturn.
Is it realistic to account for this sustained weakness of consumer demand as due to too high business taxation, too much business regulation and 'red tape'? Of course not.
Is it reasonable to put this stagnation in consumer demand down to the problems in the eurozone? Hardly.
The problem is that households took on too much debt before the recession and they are still trying to restore their finances by saving more, paying off debt and spending less. The other private components of aggregate demand, exports and investment remain weak again largely due the hangover left by the Great Recession.
In these circumstances, the only countervailing force is net government spending, whether via tax reductions or spending increases.
Instead, we have a government whose policy is to do the opposite. A policy that is thwarting incipient recovery and hangs like a millstone around the neck of the UK's medium term economic prospects.
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