Okay, so Britain didn’t fix the roof when the sun was shining. As a result, our government has too much debt, and Gordon Brown’s two beloved fiscal rules will probably be broken – assuming, that is, Gordon and Alistair don’t somehow change the rules – again.
But before we all jump on the bandwagon launched by the OECD yesterday, remember this.
The UK has had the longest ever run of economic growth in its history. Furthermore, no other country in the developed world has gone such a long time without a quarter of negative growth. Why is that? Well surely in part it is down to the government’s fiscal policy. That doesn’t make the policy right. Maybe the government should have allowed a mild recession in order to keep our finances strong – but can you imagine the flak if that had happened?
Now the OECD is giving us a bit of a dressing down. The UK is more vulnerable to the credit crunch than most other countries. Bloated house prices, government borrowing and our over-reliance on the City make for a triple whammy for the UK.
Yet as recently as September last year, we headlined this about an OECD report: “OECD gives UK glowing report.”
For years the UK sat at the front of the class, proudly wearing stickers kindly placed by adoring economists from the OECD and IMF.
Now the tide has changed, and we are told we are paying the price for mistakes made years ago.
It is not that the UK hasn’t erred. But when the media lambastes the government, they seem to forget that they were perfectly happy to jump on the “house prices always go up” bandwagon.
The media tend to extenuate the national mood. The national mood was wrong – we put false hope in house prices. The government simply made the same mistake as everyone else. Okay, the government is supposed to lead; set the agenda, not follow it. In failing to try and deal with this absurd faith we placed in the housing market, the government missed the point.
As for the third reason why the UK is set to suffer more than most – our over-reliance on the City – well, it is open to debate whether this is a bad thing or not.
Surely the City and our financial services are our strength. As globalisation continues apace, the global financial markets will become even bigger, and even more money will flow into the UK’s financial sector as a result.
What we are seeing is a blip in the inexorable march of the City.
Yes it could be argued we are too reliant on the City. The golden rule of investing is a diverse portfolio. Likewise, no economy should put all its eggs in one basket.
In recent years the UK’s industry has suffered because of the strength of the pound. Economists refer to it as the Dutch problem. So named after oil exports pushed the guilder so high that Dutch companies lost competitiveness.
Two factors have pushed the pound up – high consumer spending (borrowing,) and the strength of the City pulling money in from overseas.
That is why the falling pound is a good thing for British industry.
But here is the mystery.
The OECD now reckons the UK will grow by 1.8 per cent this year. More to the point, it has lowered its projections for next year from 2.4 to 1.4 per cent.
Like all the rest of the economic forecasters, it failed to call the seriousness of this economic crisis and how it will affect the UK.
Maybe this is the reason.
Many economists, and the Bank of England especially, are clinging to the belief that rising house prices do not lead to rising consumer spending, and neither will falling house prices lead to falling consumer spending.
They base this on evidence that consumer spending did not rise in tandem with house prices earlier this decade.
But this flies in the face of common sense. Of course people have been saving less, of course they have been putting less into their pensions during that period of high house-price growth – although maybe there is a time lag involved.
If the data suggests there is no link, then the data is either wrong, or incorrectly interpreted.
It is possible that the reason why consumer spending did not rise as fast as house prices earlier this decade is that consumer spending was already too high, and unsustainable. The surging house prices just maintained this.
The real problem that the UK suffers from is too low savings. This was clearly exacerbated by the housing boom.
This is why the UK is suffering now. The UK suffered from a nasty bout of delusion. There were many victims, the government, the media, many economists, including individuals at the IMF and OECD, and the public.
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