Socialist Economic Bulletin

.499ZBritain’s economic ‘boom’By Michael Burke

As the British economic crisis becomes more prolonged the outbreak of stupidity that greets every new piece of important economic data becomes more generalised. Previously there has been a campaign to suggest that austerity has led to recovery when the opposite is the case. The recovery is based unsustainably on rising consumption, led by government consumption. The publication of the latest GDP data for most major economies has now led to wild suggestions that Britain is booming and is the strongest major economy in the world.

The level of real GDP in Britain since the recession began at the beginning of 2008 is shown in the chart below. It is compared to the US and the Euro Area. British growth has been almost exactly the same as that of the Euro Area as a whole and significantly worse than US GDP growth.

It is widely known that many countries in the Euro Area have experienced a severe Depression. Since British growth is now almost exactly the same as the average for the Euro Area as a whole during the crisis it follows that it must be worse than some and better than others. This is shown in the chart below, where among the larger economies Britain’s GDP growth is stronger than both Spain and Italy but worse than both France and Germany.

Outside the Euro Area the British economy is free to set its own monetary policy and to devalue the currency. Via Quantiative Easing and a large fall in the pound it has taken advantage of both of those yet its growth is no better than the average of the Euro Area and is markedly worse than both France and Germany. British growth is also markedly worse than that of Sweden, the next largest EU economy outside the Euro Area.

The cumulative change in real GDP for selected industrialised economies is shown in the chart below. Despite the potential advantage of independent policy setting the cumulative growth of the British economy is worse than the average, although not as poor as Italy and Spain. (The growth of the US economy is slightly overstated because official data now show that the US recession did not begin until the 3^rd quarter of 2008).

In no case is this a robust recovery in the industrialised economies either by historical standards or compared to the most dynamic economies in the world currently. Over the same period from the 1^st quarter of 2008 the Chinese economy has grown by approximately 60%.

Even compared to the last US recession, current performance has been variously described as ‘sluggish’ or ‘disappointing’. The US is frequently held out as a model of economic recovery. But it has recently entered its fifth year of economic expansion and GDP is just 10% above its low-point in 2009.

The British ‘boom’ is much worse. The low-point of GDP occurred in mid-2009 and since that time has increased by just 5% in 5 years. And the Labour Party was responsible for just under half of that, GDP rising 2.4% in the quarters following the increased investment of the 2009 Budget.

‘Secular stagnation’

Authoritative economists such as Larry Summers (video) and Gavyn Davies and others have instead been discussing the ‘secular stagnation’ of the industrialised economies. Paul Krugman wonders whether this is ‘a permanent slump’.

In the chart below Gavyn Davies shows the actual level of GDP in four economies combined (US, Euro Area, Japan and Britain) are shown along with the consensus forecasts for growth (the blue lines). The trend growth rate of those economies is shown the red line. The dotted yellow line shows the average estimate of potential output.

The red line represents previous level of growth whereas the dotted yellow line represents the average of estimate of what is now possible for growth. In both cases, actual and forecast GDP is set to remain below those levels for some time. But much slower growth projected by the depressed level of estimated potential output shows that the dominant idea is something close to ‘secular stagnation’ for the leading industrialised economies, something like 1.2% growth per year.

Summers and others correctly identify the main cause of the crisis as the slump in business investment, as SEB has argued. However he argues that this is because interest rates are above the level of anticipated return on investment. Yet the widely-acknowledged cash hoard of western firms belies this notion. The large firms which overwhelmingly account for investment have no need to borrow to invest as a result of this cash mountain. They are hoarding cash because the anticipated return itself has fallen. The anticipated return is otherwise known as the profit rate.

The stark long-term consequence of this trend towards declining profitability, lower rates of investment and cash hoarding are shown in a recent chart from the OECD, below. A turning-point in the world economy occurred at the beginning of the 1970s as the long post-War boom was brought to an end. Since that time each recovery from recession in the OECD has been weaker than the preceding one. The Reagan/Thatcher offensive to restore profits has led instead to a progressive weakening of the OECD economies.

The current slump had the weakest growth prior to the recession and the most severe downturn as well as the weakest recovery from it. A hat-trick of neoliberalism.

The growth of the British economy conforms to these patterns and sits in the middle-to-lower band among the OECD economies. The OECD predicts 1.4% GDP growth in Britain for 2013 and 2.4% in 2014.
Only a complete fraudster would describe the British economy as the strongest in the world. Only someone entirely ignorant of both recent and historical economic trends would describe either current or forecast growth in Britain as a boom.

.714ZWhy public investment is fallingBy Michael Burke

The level of public investment is falling in most of the advanced industrialised economies including Britain. The chart below appeared in the Financial Times and has attracted some publicity because it shows this decline in the US in stark terms.

The difference between gross government investment and net government investment is accounted for by depreciation. All investment is subject to depreciation over time. This deducts from the level of gross investment. In the US net government investment (after depreciation) has fallen from 4% of GDP close to 1% of GDP.

It is set to fall further. The chart below also appeared in the FT piece but was less remarked. It shows the various Budget proposals from the Republican and Democrat parties in Congress as well as the Obama proposals. In all cases the Budget plans are to maintain a trend decline in public investment (excluding defence spending) with just one minority proposal for a temporary increase in investment.

Both the British government and the US government have talked a great deal about the need for greater investment in infrastructure and greater public investment. But the chart below from the Institute of Fiscal Studies (IFS) shows an even more dramatic decline in the level of net public investment in Britain than in the US. Government claims that it is promoting investment are false.

The long-run decline in public investment was interrupted during the crisis. In 2009 the Labour government had a temporary increase in public investment. SEB has peviously shown that this was responsible for a recovery which was actually more robust the the current weak upturn. It should be noted that the much earlier level of public investment was associated with much stronger rates of economic growth and increase in living standards.

The Coalition government slashed public investment so far that net investment even turned negative in the Financial Year just ended. This is caused by the rate of depreciation exceeding the rate of investment. The very modest rises ahead are IFS forecasts.

But this negative rate of net investment is not unprecedented. Net investment fell even more sharply at the turn of this century as the New Labour government stuck to Tory spending plans. Cuts in public investment exacerbate the cause of the current crisis which is an investment strike by firms. This is especially true as public investment is often directed towards decisive areas such as infrastructure (like flood defences) and transport (such as the rail network). When net investment falls to zero or below, things literally fall apart.

Western governments remain dominated by ideas that became established in the Thatcher/Reagan era and were reinforced by Blair and Clinton. Key to these was an attempted reduction of the role of the state in the economy which was dubbed ‘getting out of the way of the private sector’ in order to boost profits. The crisis of 2008-2009 and the stagnation since have disproved that notion.

George Osborne will produce the latest Autumn Statement in December. It will contain no increase in public investment. Instead he is likely to adopt very stringent future public spending targets in the hope that Labour will commit to them. If it does the Tories will then demand that Labour indentifies where it will cut, which can only damage its own support and further damage the economy.

Tory spending cuts have already wrecked a recovery once. Labour’s own history shows that adopting Tory spending plans was both economically and politically damaging. The scale of the current crisis means that repeating that error would be disastrous.

.054ZWhat are the economic alternatives to austerity? Saturday 9 NovemberSession at this Saturday’s Labour Assembly Against Austerity

What are the economic alternatives to austerity?

Speakers:

Ken Livingstone

Ann Pettifor

Michael Meacher MP

Michael Burke

Labour Assembly Against Austerity

10 – 5 Saturday 9th November

Birkbeck College London

Other speakers at the Labour Assembly include:
Owen Jones,   Diane Abbott MP,   Frank Dobson MP,   Katy Clark MP,
Jeremy Corbyn MP,   John McDonnell MP,   Steve Turner (Assistant General Secretary Unite)  &
Tosh McDonald (Vice President ASLEF).

Other Sessions:
Housing – solving the crisis
No to privatisation – keep health and education public
Opposing austerity – defending public services and the welfare state
Defend the link – defend trade union rights
No scapegoating – immigrants and claimants are not to blame
Fund public services not war
Ending austerity – Labour policies to win in 2015

Conference discussing the alternatives to austerity that Labour needs to put forward to stimulate growth, jobs and better living standards.

Admission £10 (£5 concessions).

For further information and to register visit here

.698ZLabour Assembly Against Austerity

 9am – 5pm, Saturday 9th November
Birkbeck College, Malet Street, London WC1E 7HX

Speakers include:

Ken Livingstone
Owen Jones
Francesca Martinez
Steve Turner (Unite)
Ann Pettifor

Diane Abbott MP
Katy Clark MP
Jeremy Corbyn MP
Frank Dobson MP
John McDonnell MP
Michael Meacher MP

Professor Keith Ewing
Tosh McDonald (ASLEF)
Peter Willsman (CLPD)
Adrian Weir (Campaign for Trade Union Freedom)
Catherine West PPC
Cat Smith PPC
Murad Qureshi AM
Heather Wakefield Unison

Shelly Asquith
Daniel Blaney
Michael Burke
Mike Hedges (Unite)
Conrad Landin
Cllr Alice Perry
Christine Shawcroft (NEC)
Cllr Kate Taylor
Marsha-Jane Thompson (Defend the Link)

Sessions:

• The economic alternatives to austerity
• Housing – solving the crisis
• No to privatisation – keep health and education public
• Opposing austerity – defending public services and the welfare state
• Defend the link – defend trade union rights
• No scapegoating – immigrants and claimants are not to blame
• Fund public services not war
• Ending austerity – Labour policies to win in 2015

£10 full price / £5 concessions

Visit LabourAssemblyAgainstAusterity.org.uk

Labour Assembly Against Austerity –  a forum for Labour Party members to discuss alternatives to austerity and the policies Labour needs to stimulate growth, jobs and rising living standards.

The Labour Assembly Against Austerity is an initiative of Next Generation Labour in support of the People’s Assembly Against Austerity movement and is supported by Unite, UCATT, BECTU, CLPD, Labour Representation Committee, Left Futures, Chartist, Labour Briefing Co-op, Morning Star, Red Labour & Sinistra Ecologia e Liberta UK.

.030ZThe cash hoard of British firmsBy Michael Burke

The crisis of all the western industrialised economies is one brought about by the refusal of firms to invest, an investment strike. SEB has previously shown that for the Western economies as a whole the investment strike is leading to two simultaneous trends. While the portion of profits that remains uninvested is growing, payouts to shareholders are reaching record levels and there is a growing cash mountain held by firms.

This article in The Guardian by the present author highlights that process in Britain.

The chart below illustrates the growth of uninvested profits (and does not appear in The Guardian article).

 
In 1970 the level of investment in the economy (Gross Fixed Capital Formation) was equivalent to over two-thirds of the gross profits of firms (Gross Operating Surplus). By 2000 this investment ratio (investment as a proportion of profits) had fallen to a little over half and declined a little more by 2007, just before the slump. But in 2012 the investment ratio had fallen to just 43%. If this investment ratio were to return now to the 1970 rate, the level of investment would rise by £122bn, or nearly 9% of GDP.

£75bn

There happens to be a neat coincidence between the current crisis and the combined hoarding cash and the payout to shareholders. Up to the 2^nd quarter of 2013 (the 3^rd quarter data are not yet available) investment had fallen by £75bn, far more than the decline in GDP (now at £40bn). £75bn is almost exactly the same rate at which companies’ cash hoard has been growing annually since the crisis began in 2008. It is also slightly exceeded by the anticipated payout to shareholders in 2013 of £80bn. Far from being ‘no money left’ these two sources alone, shareholder dividends and the growing cashing mountain, are double what is required to resolve the current crisis.

Recently government ministers have taken to begging companies to invest their cash mountain, after cajoling and bribery have both failed. This can be illustrated through the government policy of cutting corporate taxes and the fallacy that this will spur investment. In 1970 corporation tax was 40% and it has been slashed by this government on the road to a 20% rate, but the investment rate has fallen by around one third.

None of these government efforts will work. Privately owned firms are driven by the concept of ‘shareholder returns’, which is itself counterposed to economic well-being for the overwhelming majority of the population. For them, only the restoration of profits will encourage investment, not pleas for the general good.

The soaring level of uninvested profits, and their diversion towards dividends and a growing cash mountain is the great disappearing trick of the current economic crisis. Until it is resolved the fundamental source of the crisis will remain unaltered.

The cash hoard of Western companiesBy Michael Burke

Supporters of ‘austerity’ would have a very strong argument if there really were no money left. In that case, opponents of current policy would be left arguing only for a fairer implementation of those policies, or that perhaps they could be implemented more slowly.

This is not the case. Firms in the leading capitalist economies have been investing a declining proportion of their profits. This is the cause of the prolonged period of slow growth prior to the crisis and a number of its features such as stagnant real wages, so-called ‘financialisation’ and the growth in household debt.

This negative trend of declining proportion of profits directed towards investment reached crisis proportions in 2008 and is the cause of the slump. As a consequence of the sharp fall in this investment ratio there has been a sharp rise in the both the capital distributed to shareholders and in the growth of a cash hoard held by Non-Financial Corporations (NFCs). This cash hoard is a barrier to recovery, releasing it could be the mechanism for resolving the crisis.

The chart below shows the level of surplus generated by US firms (Gross Operating Surplus) and the level of investment (Gross Fixed Capital Formation) for the whole economy. Since the former are only presented in nominal terms, both variables are presented here in the comparable way.

 
The nominal increase in profits has not been matched by an increase in nominal investment. In 1971 the investment ratio (GFCF/GoS) was 62%. It peaked in 1979 at 69% but even by 2000 it was still over 61%.

It declined steadily to 56% in 2008. But in 2012 it had declined to just 46%.
In a truly dynamic market economy there is nothing to prevent the investment ratio from exceeding 100% as firms utilise resources greater than their own (borrowing) in order to invest and achieve greater returns.

Therefore even an investment ratio of 69% is sign of a less than vigorous market economy.
However the subsequent decline in the investment ratio to 46% is a sign of enfeeblement. If US firms investment ratio were simply to return to its level of 1979 the nominal increase in investment compared to 2012 levels would be over US$1.5 trillion, approaching 10% of GDP. This would be enough to resolve the current crisis, although it would not prevent the re-emergence of later crises.

Distribution of profits

The uninvested portion of firms’ surplus essentially has only two destinations, either as a a return to the holders of capital (both bondholders and shareholders), or is hoarded in the form of financial assets. In the case of the US and other leading capitalist economies both phenomena have been observed. The nominal returns to capital have risen (even while the investment ratio has fallen) and financial assets including cash balances have also risen. One estimate of the former shows the dividend payout to shareholders doubling in the 8 years to 2012, an increase of US$320bn per annum.

The growth of cash balances is shown in the following data from the Federal Reserve. They are the changes in key balance sheet aggregates for US non-financial corporations from 2008 to Q2 2013.
Change in Balance Sheet Components, US NFCs, 2008 to Q2 2013, US$bn.

Source: Federal Reserve

Total assets of US NFCs have risen by nearly US$4trillion over the period which is equivalent to approximately 25% of US GDP. The increase in net assets of US$2.8bn (after accounting for the rise in liabilities over the same period) is more than accounted for by a rise in financial assets of over US$3 trillion. 

By comparison the rise in the current cost value of business equipment has been less than one-tenth that (and is accounted for by inflation).

Within the rise of financial assets, cash or near-cash instruments have contributed a rise of nearly $600bn (the biggest single contributor in the accounts is ‘miscellaneous financial assets’).

Generalised phenomena

The same is true in other capitalist economies. In 1995 the investment ratio in the Euro Area was 51.7% and by 2008 it was 53.2%. It fell to 47.1% in 2012. In Britain the investment ratio peaked at 76% in 1975 but by 2008 had fallen to 53%. In 2012 it was just 42.9% (OECD data).

The cash hoards are no less striking. The total deposits of NFCs in the Euro Area rose to €1,763bn in July 2013 of which €1,148bn is overnight deposits. This is a rise of €336bn since January 2008, nearly all of which is in overnight deposits, €306bn. In Britain the rise in NFCs bank deposits has been from £76bn at end 2008 to £419bn by July 2013.

In reality, this extraordinary accumulation of cash by NFCs began well before the immediate depression in 2008, along with the slump in investment. Both of these merit further elaboration elsewhere.

Conclusion

The profitability (profit rate) of US firms and firms in other Western economies has fallen, and even the absolute mass of profits fell for a period in the recession. While the former has not recovered, the latter has. But this has not led to a corresponding rise in investment and the investment ratio has fallen sharply.
The destination of of these uninvested profits is twofold. Owners of capital are in receipt of record payouts. And the financial assets of NFCs have risen dramatically, often primarily cash as firms are unwilling to risk any type of investment.

This hoarded store of capital is both the main impediment to recovery and the potential source of resolving the current phase of the crisis.

Four important graphics from the OBRBy Michael Burke

The latest publication from the Office for Budget Responsibility (OBR) is a strange document. It is a Forecast Evaluation Report which examines its series of completely wrong forecasts since it was established. Its firm assessment of these wildly over-optimistic forecasts is that it is not because it underestimated the impact of austerity, but then provides no other explanation for its consistent errors.

Despite this the OBR does provide some useful data on the economy and presents them in a very useful way. Below are a number of graphics taken from the latest publication.

Chart 2.1 (from the NIESR) shows the latest slump in historical context. The British economy is still 3.3% below its previous peak. In every other recession the lost output had been recovered after no more than 4 years. The current slump s already more than 5 years old.

Chart 2.23 shows how much further ‘fiscal tightening’ (combined spending cuts and tax increases) has been implemented and how much is still to come. The Fiscal Year 2012/2013 ended in April this year. By FY 2017/18 the fiscal tightening will be more than 3 times as great as the fiscal tightening already completed. If these plans are implemented, either by the Tories or by Labour, the next government will be implementing austerity measures twice as severe as anything seen to date.

The key problem for the whole economy remains one of contracting investment. In Table 2.1 the OBR shows that in the latest data business investment is the only component of GDP which has been negative. It also overwhelmingly accounts for the shortfall in growth relative to the OBR’s own forecast, 4% of total shortfall of 5.7%.

This is illustrated graphically the chart below, which highlights the components of growth relative to OBR forecasts. It is clear that business investment (blue) accounts for the bulk of the shortfall, with most of the remainder accounted by the shortfall in net trade (red). This is related to the fall in investment and the declining international competitiveness of the British economy.

What the OBR calls ‘Total Government’ has been the prop for the economy over the entire period compared to its own forecasts. But in reality there is no such thing as Total Government in terms of economic activity. The activity of Government, like every other economic agent can only either be consumption or investment.

SEB has previously shown that the government is increasing its consumption while cutting its investment. This is leading an economy-wide rise in consumption and an economy-wide decline investment.

Exceptionally weak growth caused the lack of business investment, a recent increase in government consumption combined with continued reductions in its own investment and the threat of much greater austerity to come; these are the prevailing trends in the British economy.

Osborne boosts consumption while cutting investmentBy Michael Burke

In a recent piece for The Guardian the argument that government spending led the very weak recovery has been reviewed in the light of the publication of the final GDP data for the 2^nd quarter of 2013.

Because of revisions to the data, it is no longer statistically correct that the entirety of the recovery is accounted for by government spending. The final release from the Office for National Statistics (ONS) shows that real government current spending began to rise after the 3^rd quarter of 2011. By the 2^nd quarter of this year government consumption had risen by £7.7bn. Over the same period real GDP has risen by £11.7bn. As a result, the rise in government consumption accounts for two-thirds of the weak recovery over the same period.

It remains the case that the rise in government day to day spending led the recovery. It began to rise in the 4^th quarter of 2011 whereas GDP did not begin to rise until the 3^rd quarter of 2012, that is 3 quarters following the rise in government consumption.

Therefore it remains the case that it was not austerity that led to the very weak recovery. Instead, rising government consumption led the recovery and statistically accounts for two-thirds of it. Changes in GDP and its components are shown in the chart below, from Q3 2011 when government consumption began to rise.
 

 
It is notable that household consumption is also rising and is the largest single contributor to growth over the period. Meanwhile, despite all official claims to the contrary investment continues to decline.

Since the recession began in 2008 the total decline in GDP has been £52bn and despite all talk of recovery the economy is still 3.3% below its prior peak. This is the worst performance in the G7 apart from Italy.

The decline in investment is much greater than the decline in GDP. Over the same period the decline in investment (Gross Fixed Capital Formation) has been £64bn, which more than accounts for the entire decline in GDP. The decline in investment also led the slump as a whole. GFCF peaked in the 3^rd quarter of 2007 and over that period has fallen by £71.4bn. The fall in investment more than accounts for the recession and led it. Business investment alone (excluding investment by both government and private individuals) fell by £43.2bn over the same period. By itself the decline in business investment accounts for the bulk of the contraction in GDP of £52bn. This is the source of the economic crisis, and is shown in the chart below.
 

 
Even while the government has been increasing consumption expenditures it has continued to cut its own investment. Since the 3^rd quarter of 2011 government investment has fallen by £1bn and since the Comprehensive Spending Review of 2010 it has fallen by £4.4bn.

This reproduces all the worst aspects of British long-term economic decline. Consumption is rising while investment is falling. No economic theory supports the idea of consumption-led growth. This is for the simple reason that if the productive capacity of the economy is not being increased simultaneously through investment, then all that is being consumed is that productive capacity.

Despite much fanfare the government has not added any investment at all during its time in office. Much of the large-scale investment currently taking place such as Crossrail was inherited from the previous government and difficult to cancel. Where it could cancel investment it did so, such as the building programme for schools.

The government is content to cut investment while increasing its own consumption and belies any notion the deficit-reduction or sustainable recovery are the goals of economic policy.

To invest in plant, machinery, equipment (including transport equipment and facilities) is to expand the means of production. Since the whole purpose of austerity is to drive up the profit rate of private capital, increasing state-led investment is ruled out. This would place an increasing proportion of the means of production into state hands and not in the hands of private capitalists. It is also why the government is willing to cajole, subsidise and even bribe firms to invest but unwilling to invest on its own account. The lack of success in this field is attributable to fact that those same firms do not yet judge profits to have recovered sufficiently to risk increasing investment.

Therefore there remain only two paths out of the current crisis. The current weak recovery is only supported by increasing government consumption and is not sustainable (although it may be the intention to continue this up to the next election). The private sector-led resolution of this crisis sought by the government requires an increase in the profit rate to be achieved by cutting wages, lengthening the working day and scrapping existing productive capacity. The alternative solution remains state-led investment with the government directing investment in key sectors of the economy, taking over a number of them where necessary.

Capping energy prices and investment in renewables are both requiredBy Michael Burke

The announcement by Ed Miliband that Labour would temporarily cap energy prices is a welcome one. But the reaction to it reveals to deep-seated problems of the British economy and British politics.

According to Labour’s own (uncontested) research household energy bills have risen by 29% in 3 years. Therefore the pledge to cap prices rises for 20 months is really a very modest reform. According to a campaign tool ‘Freezethatbill’ the average household has seen bills rise by £300 under the Tories and will save £112 a year from this policy. That would be an estimated saving of £160 in total.

The reaction to this moderate plan has been vociferous and extreme. Lurid headlines about the lights going out in Britain have been accompanied by open threats from the large energy companies to discontinue investment. SEB has long argued that the cause of the slump is an investment strike by private firms. The energy companies threatened to make that an all-out strike in their sector.

The Tory energy secretary and a host of MPs immediately relayed the threats of the energy companies. This is hardly surprising given the very large donations those companies make to the Tory Party. The Tory Press did likewise.

However it cannot be argued that this was simply scaremongering, based on empty threats. It is already the case that the energy companies do not invest sufficiently, either in storage capacity or in renewables. The energy companies, especially those controlling energy reserves, have previously withheld supplies in order to push up prices. It was previously reported that in March this year the British economy was just half a day away from running out of gas. But the reality was that energy companies withheld available supplies, which drove up liquefied natural gas prices to 150p a therm, from 57p earlier in the year.

In pursuit of profits, the energy companies have been willing to collude in driving up prices, and endangering supply. They are able to do this, in part, because existing capacity is extremely limited and they are an oligopoly.

This is the real threat to Ed Miliband’s policy. Clearly the price pledge is only relevant if wholesale energy prices are rising. Capping retail prices for business and household consumers while wholesale prices are rising can only lead to a profits squeeze. As a result the energy companies threaten that they will reduce their already inadequate level of investment, even while some of them have caved in on the temporary price freeze. This could lead to energy shortages and would end Ed Miliband’s much more ambitious goal of de-carbonising energy production by 2030.

The financial position is clear. Taking the shareholder payout from just British Gas, Centrica, Scottish & Southern Electricity and National Grid alone the current annual dividend is £3.4bn. Yet despite the imperative for investment in renewables, the level of investment has halved from already low levels over 3 years.

This private investment slump has been exacerbated by the withdrawal of state investment in the energy sector under this government. Private companies have proved incapable of providing the necessary investment for long-term projects over a prolonged period. They are simply unwilling to take the risk. Yet the current government has reduced its own investment in subsidies for renewables which reflects its commitment to the oil companies and in pursuit of the illusory benefits of fracking.

Ed Miliband’s policy of capping energy prices is very welcome. It makes a small contribution to softening the fall in living standards. But the extreme response to it highlights the complete unwillingness of the energy companies to provide the necessary investment in renewables and storage capacity. De-carbonisation and energy security require large-scale state-led investment. Instead dividend payouts to shareholders are at record levels. Faced with sabotage and threats from the energy companies, nationalisation is a necessary step that can lead to the investment that is imperatively required.

Did austerity lead to recovery? No, GDP was increased by government spendingBy Michael Burke

The government and its supporters have been quick to claim that the most recent GDP data have vindicated its austerity policy. George Osborne says the argument in favour of austerity has been won some more excitable commentators have even talked of a boom.

Usually, SEB would provide analysis of the GDP data after the publication of the national accounts, the third release in the cycle from the Office of National Statistics, which provides a detailed breakdown of the components on economic activity and the final revision to the data.

But the claims made for the British economy following the most recent GDP release (and some subsequent surveys) are so outlandish, and so at odds with the facts, that is worth providing a short analysis now.
The data is still partial and subject to revision. But there is enough evidence to demonstrate factually that the weak recovery is not a reward for austerity, but is in fact entirely a function of increased government spending.

The economy has expanded by just 1.8% in 3 years of austerity, an annual rate of 0.6% which is less than one-quarter of previous trend growth. The gap between the current level of GDP and trend growth for the British economy is widening. In addition, the growth to date is entirely a function of increased government spending.

Factual Analysis

This verdict is so at odds with both stated government policy and the overwhelming commentary on the latest data. Therefore it is important to provide the hard evidence supporting this analysis. The can be found on Table C2 of the latest release, Second Estimate of GDP, Q2 2013 (ONS).

Total government current spending was barely changed from the time the Coalition took office to the end of 2011. (In the ordinary course of events real government spending should rise in line with population growth and in a recession should rise much faster to offset the effects of recession. Unchanged government spending represents a harsh ‘austerity’ stance).

However, from the 4^th quarter of 2011 to the 2^nd quarter of 2013 government current spending has risen decisively by an annualised £15.1bn. GDP did not begin to expand until two quarter later. This is the time lag SEB has previously identified in the relationship between changes in government spending and changes in GDP. Rising government spending has led the recovery.

While the increase in government spending since the 4^th quarter of 2011 to the most recent quarter amounts to £15.1bn, the rise in aggregate GDP over the same period is just £14.8bn. Therefore, the rise in government spending not only led the recovery, but more than accounts for the entire expansion over the same period (as some other components of GDP have contracted).

Rising government current spending tends to support consumption, which is exactly what has happened over the last 18 months. The rise in household consumption has been the strongest of all components of GDP over that period, rising by £25bn. The chart below shows the changes in the national accounts since the government began increasing its current spending after the 4th quarter of 2011.

But weak household spending is not the source of the crisis. This remains the slump in investment. GDP is still £50bn below its previous peak in the 1^st quarter of 2008, but investment (Gross Fixed Capital Formation) is £65bn lower. Household consumption also remains below £24bn its pre-recession peak. But it has been rising continuously for 2 year and now accounts for under half of the total decline in GDP. The fall in GFCF more than accounts for the entire fall in GDP.

It is not possible from the partial release of the data for the 2^nd quarter of 2013 to establish the role of government in the continuing investment strike. But from the 1^st quarter national accounts, it is clear that declining government investment has been exacerbating the private sector decline in investment. Government investment peaked under the last Labour government and has been cut continuously ever since.

But the analysis is confirmed by the separate ONS data on public finances. The presentation of the public finances data vary significantly from the presentation of government consumption data in the national accounts. Among the many differences is that the former are presented in nominal terms only. Even so, these show (Table PSF5) that in nominal terms the level of departmental outlays rose to £305bn in the first half of 2013, from £283bn in the same period of 2012. This is a rise of 7.8% and way above the rate of inflation.

Conclusion

There is no mystery to the current very weak recovery. It is led by a moderate increase in government spending, which more than accounts for the entire increase in GDP over the same period.

This runs counter to the government’s stated ‘austerity’ policy. But it is accompanied by a cut in government investment, which exacerbates the private sector investment strike. It is this investment strike which remains the source of the crisis, which cannot be resolved by increasing current spending.

Logic would dictate that any government which wanted to support the economy would increase investment, which is the source of the crisis. Conversely, any government fixated on deficit reduction would probably be inclined to cut both current and capital spending.

This government is committed to neither economic recovery nor deficit-reduction. Instead, it is committed to boosting profits. That is why it is willing to increase current spending which supports consumer demand but refuses to increase investment as this would displace private capital from potentially profitable sectors of the economy.

Since this government is not sticking to its own spending plans, it makes even less sense for an incoming Labour government to do so. Instead, it needs to address the source of the crisis by increasing state investment.