May 2014 – LONDON – James Meadway, a former UK government policy adviser at the Treasury, has criticized Chancellor George Osborne’s claim that newly released GDP figures prove “Britain is coming back.” He argues that the government’s relentless pursuit of stringent austerity and expansion of household debt is reinforcing the risk of a major economic crash. Currently a senior economist at the New Economics Foundation (Nef) in London, Meadway argues that the policies driving UK growth are fatally flawed: “We are setting up… exactly the conditions that helped produce the crash of 2008: debt-led growth, in which stagnant or falling real earnings are masked by increasing levels of household debt that sustain continued consumer spending.” Despite the 0.8% increase in growth over the last quarter, current performance indicates that manufacturing output “will not recover to its 2008 level before 2019.” With average earnings rising at a rate of 1.4%, and the Consumer Price Index’s inflation figures ignoring the large cost of housing at around 40% of household income, real inflation “is now running at 2.5% a year, well ahead of increases in earnings…”The fall in real earnings since 2008 is the longest sustained decline in most people’s living standards since the 1870s.” This situation is likely to continue. As the government’s Office of Budget Responsibility forecasts, real earnings will fall “virtually every year until 2018.” The fall in real earnings has accompanied increasing inequality, impacting detrimentally on health, well-being and crime rates. Data from the European Quality of Life Survey finds that between 2007 and 2011, the well-being of the richest quarter of Britons rose, while dropping for the poorest quarter.
In the meantime, while real earnings are falling, household spending has experienced “the fastest rate of growth since 2007” – sustained by ‘falling savings and a return to borrowing.” This has fuelled a London-centric property bubble that favors the wealthy. With levels of UK public sector debt topping £1.2 trillion, Osborne has borrowed more in the last 5 years than Labour did throughout its 13 years in government, having left Britain at $0.8 trillion in debt. At the end of last year, outstanding personal UK debt stood at £1.4 trillion, and outstanding mortgage debt at £1.3 trillion. Total household debt is predicted to increase to £2.2 trillion by 2019. The problem, Meadway told me, is that as with the 2008 banking collapse: “The danger of another crash certainly increases the more debt is being created. It looks like, at present, that the UK’s household sector could become the weak link in all this – if earnings do not pick up, the sheer mass of accumulated debt, with the need to service (to repay and pay interest) could start to present problems. So if the recovery follows its current course, the possibility of such a domestically-generated crash will rise.” According to a new report by economist Dr Jo Michell of the University of the West of England’s Bristol Business School, projections using the Cambridge Alphametrics macro-economic policy model (CAM) show that “this growth strategy cannot be sustained.” The misnamed ‘recovery’ is merely “a return to the debt-led and consumption-driven growth of the pre-crisis era…
“The government appears determined to press ahead with a policy program designed to reproduce and reinforce the imbalances which proved so deadly in 2008. But [Osborne’s] reliance on the indebtedness of the household sector to maintain GDP growth rates is fundamentally unsustainable. One way or another, the current trajectory will come to an end.”This is compounded by looming energy challenges. Since 2010, UK household energy bills have risen by 40%, a trend that is likely to continue under the government’s current energy policies focusing on shale gas. “North Sea gas has depleted far faster than was bargained for in the early 1990s, and Norwegian supplies are also under severe pressure,” said Meadway. “Reuters research has suggested that we will start having to import from Russia in 2015 – indeed, we already buy 40% of our coal for electricity production from Russian sources. Fracking, as Lord Browne has acknowledged, is unlikely to produce reductions in fuel bills, since unlike the US the gas price here is set by conditions on the European market, not production conditions in the UK.” The role of energy crisis in sparking recession is ignored by conventional economic models. However, American economist Prof James Hamilton of the University of California has modelled the link between oil prices and US recessions – including the 2008 crash – in a study for the US Congressional Joint Economic Committee. Prof Hamilton concluded that the collapse of the housing bubble was triggered by the post-2005 oil price shocks which escalated cost of living and induced sweeping consumer debt-defaults. –Guardian