It is often said that when all three political parties are locked together on the same idea, it is bound to be wrong. Given the Tory-LibDem coalition determination to continue austerity unabated throughout the next Parliament, it is sad to see Ed Miliband telling the NPF forum over this weekend that “we won’t have the money……Britain still has a deficit to deal with and a debt to pay down”. Of course the deficit has to be paid down, but the assumption that it has to be paid down by cutting public expenditure and benefits isn’t just harsh and cruel for its main victims, those on the lowest incomes, it is actually counter-productive. The reason for this is that the public debt is what remains after the totals of net lending or net borrowing by corporations, households and foreigners have all been added up. The latest evidence from the Office of National Statistics (ONS) shows that, following the austerity route over the last 5 years, public sector debt (the deficit), so far from reducing, is now likely to start rising.
Corporations in 2013 began raising their net lending significantly rather than investing because they didn’t have the confidence that the recovery would last. Households, having run down their debts substantially since the 2008 crash, have now become net borrowers again, but on nothing like the scale before 2008. Foreigners who (if they are willing) finance our balance of payments deficit now have to cope with a rising UK trade deficit, UK net income from abroad now significantly negative , and net UK transfer payments overseas, which are outside the government’s direct control. The net effect of all these processes was that last year the deficit was £95.5bn.
However, the outlook for 2014, despite all the government’s rhetoric about fast recovery, is actually darkening. Already there are official figures showing that the recovery in the construction sector has stalled, factory output has fallen, and the trade balance is worsening. The fundamental weaknesses in the UK economy are now becoming painfully apparent: our very low rate of investment, manufacturing fallen to 10% of GDP so we can’t pay our way in the world, increasing government debt, and consumer demand too heavily dependent on asset price inflation (particularly an over-heated housing market). Against that background it is almost impossible to see the deficit falling, and it is indeed more likely to rise this year. If the ONS official figures for the first quarter deficit this year are projected forward, they suggest that public sector borrowing in 2014 will rise to some £105-110bn.
This is really a dead end for the austerity route. The alternative, which cries out to be used, is for public investment to kickstart the economy (so long as the private sector investment strike continues) and/or for the excessively high sterling exchange rate to be significantly lowered so that UK manufacturing can begin to recover from its relentless post-war decline.