Policy Research in Macroeconomics

The scale of the Coalition government’s ambition

By Ann Pettifor, Originally published on the blog for the Centre for Labour and Social Studies

Ed Davey’s announcement (on behalf of the government) on the eve of the Budget was a little breathless. All agog, he painted a picture to the BBC of cabinet ministers listening gratefully and with relief to the chancellor’s announcement at cabinet that morning.

The Treasury plans to cut £2.5bn of current spending from several government departments – and transfer the money to another pot, for investment in infrastructure (probably housing).

This investment will be welcome to the construction industry. Total construction work in the UK between November and January 2013, was 10% down on the same period a year before, according to the ONS. Taken on an annual basis this loss to one industry in one year, is roughly equal to the £2.5bn the chancellor intends to invest in ‘infrastructure’ over the next two years.

“What was really noticeable around the cabinet table” according to loyal Ed Davey “was people supporting the overall approach not only of the chancellor but the Chief Secretary to the Treasury Danny Alexander.”

Davey and the cabinet appear to believe that these meagre savings, which do not represent additional spending, when applied to ‘infrastructure investment’ will help restore Britain’s economy to health.

To believe this they have to be oblivious to the scale of Britain’s economic failure – and to the steepness of the gradient to be climbed to get back to where we were before.

It’s as if the cabinet has been blinded by the blast that was the 2007-9 financial failure – and can’t see past the extreme intensity of the light flash that is our prolonged and painful recession.

£2.5bn sounds like a lot of money to you and me. And indeed it will be a lot of money for those construction companies lucky enough to win the contracts.

But in terms of the economy as a whole £2.5bn is meagre.

It represents about 1/7th of 1% of the nation’s economic cake – the Gross Domestic Product of about £1,500,000,000 p.a.

Since the financial crisis a great big hole has been blown out of the ‘cake’ that is the economy – a £500,000,000 ‘crater’ of economic failure and inactivity.

We arrive at that number by adding up the loss (or fall) of GDP each year since 2007. That loss amounts to about 15% of annual GDP (£1,500bn). We then add the amount of economic activity that, on the basis of past experience, could reasonably, but cautiously be expected to be added each year – a modest 1% p.a. Aggregated, this comes to a further 15% that could have been gained between 2008 and 2012.

Adding the actual loss to that which we could reasonably expect to have gained, amounts to a loss of 30% of potential UK GDP.

In other words the ‘crater’ of lost opportunities, investment, and employment; the bankruptcies, declines in incomes and profits – amount to a hole equivalent to £500bn – 30% of the nation’s GDP.  And that is a conservative estimate.

Picture a cake with almost a third devoured. Now imagine a crumb the size of 1/7th of 1% of the cake, placed on the plate to fix the hole.

That is the scale of the British Coalition government’s ambition.

One Response

  1. From their political point of view, the best thing the Chancellor could have done would have been to suspend National Insurance for as long as it takes for the economy to recover.
    That is the level of shock and awe policy required to get this moribund economy back on its feet.

    Instead we have a small deckchair reshuffle and a Carney Cult seance.

    What’s depressing is that Labour aren’t any better.

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