What is the UK doing?
October 6th, 2011
On Wednesday there were new figures for the UK the year to June 2011. They showed overall growth had slowed to just 0.1% in the last quarter of that year. They also showed that public spending had gone up by 1.3% in real terms over the twelve months.
The government’s stated strategy was to lead a private sector recovery, whilst cutting back on public spending. The idea was to run a tight fiscal policy, supplemented by a loose monetary policy. Recent numbers show this is not what is happening.
The government aims to borrow more than £10 billion a month extra this year. The March budget increased both public spending and borrowing compared to the emergency budget of June 2010. When I first revealed the big cash increases in spending for 2010-11 and 2011-12 in the successive Red Books published by the Coalition, many ignored it, some argued that I needed to look at real terms and not cash, and some went on to assert there would be real terms cuts.
I could not see how total current spending could be said to be falling in real terms, given the scale of the cash increases. Nor this year is it easy to see how the 3.8% cash increase should translate into a real reduction, as this year is meant to see a freeze on pay and better public sector buying. The official confirmation yesterday that real term public spending has been growing is a welcome shaft of light which will doubtless be ignored by most commentators.
We need to examine carefully the government’s statistical way of calculating so called real terms spending changes. There seems to be a temptation to expect substantial inflation of public sector costs. This needs to be questioned at a time of self advertised pay restraint, and given the need to make rapid strides in productivity after a very disappointing decade for efficiency improvement.
The Bank today is considering whether to embark on another round of Quantitative easing. Just as the government is not delivering the promised tight fiscal policy, the Bank in recent months has not been producing the easy money for private sector led expansion. This is not surprising, as the regulators are telling the private sector banks to have and hold more cash and capital, which severely limits their scope to lend more. This prudence is validated by the worries over the valuation of Euroland sovereign bonds and loans to Euroland banks, which could cost the banking sector further losses of capital and lending capacity. Lack of confidence also constrains people from seeking to borrow, as they worry about their jobs, their incomes, and their existing borrowings.
As this week’s figures reveal, the high rate of inflation in the UK is taking its own toll. Real incomes are falling and consumption is falling, reinforcing the domestic weakness. I am afraid we expect more of the same. The squeeze on the private sector is not yet over. Expect more falls in rents, property prices, real incomes, and discretionary spending. If they are going to adopt more quantitative easing they need to spend the money in the private sector, not the public, if they want it to fuel a private sector led recovery. These figures mean we continue to recommend avoiding UK domestic based shares.
