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Job Fears ReinforcedBy Michael Burke

SEB recently wrote that the improvement in Britain’s employment is unlikely to last. This is because jobs growth is a lagging indicator and reflects the previous upturn in activity. As the recovery has ground to a halt in the last 6 months this will in time lead to renewed weakness in jobs.

These fears are reinforced by the latest monthly jobs survey from the Recruitment and Employment Confederation and accountants KPMG. The May data show a further deceleration in jobs growth. The survey has a good track record, with turning-points in the employment data coinciding with turning-points in the survey. The value of the survey is that it is more timely- while REC/KPMG have produced May data, the next employment release from the Office for National Statistics due on June 15 will be for the period to April.

The survey for both full- and part-time jobs is shown in the chart below. Any reading above 50 indicates an expansion in jobs and anything below 50 indicates a contraction. The May reading extends the trend of decelerating employment growth, heading back towards a stagnant jobs market or even worse.

Figure 1

The Tory-led collation has previously attempted to claim the prior improvement in jobs as supporting its contention that the economy will grow even while it cuts public spending and public sector jobs. It is even implied that private jobs have grown because of government cuts. This was wholly dishonest, as all mainstream economics accepts that changes in employment follow changes in activity. Therefore the previous growth of employment reflects the earlier recovery, not this government’s actions. Government spokespersons have since become more circumspect.

Government policy has led to economic stagnation. Both economic theory and the most recent evidence suggest that jobs losses will follow.

T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

Public Versus Private OwnershipBy Michael Burke

Recent political and corporate events have thrown the relative merits of the public and private sectors into sharp relief.

The NHS is the most popular institution in Britain. According to recent research (p.386) by Lord Ashcroft for the Tories the NHS has a 79.8% approval rating – ahead of the BBC’s 66% and 61.8% for the Royal Family (and 43.1% for the Daily Mail, the lowest rating of all). Full details of the poll and voluminous and valuable additional information can be found here

This fact, and the recent mobilisations by the TUC, provides a difficult environment for the Tory-led government’s attempts to significantly reduce real health spending while qualitatively increasing the role of the private sector.

It is further complicated by the financial distress and possible collapse of Southern Cross Britain’s biggest care home provider. Southern Cross has nearly 31,000 residents in its care homes, mostly elderly patients. It is widely described as having reached a financial crisis because it sold its care home properties and leased them back prior to its flotation on the stock market.

However, this misses an essential point. Blackstone, the private equity group, owned both Southern Cross and the vehicle which became its landlord, NHL. Both were loaded with debt by Blackstone the proceeds of which it took for itself. The debt was created in order to strip the assets. Blackstone’s initial investment of $500mn became a payout of $1.5bn.

At risk now are all 31,000 vulnerable residents in the care homes. Many have already been living in atrocious conditions for some time as lack of capital and high debts precluded investment. In 2010 Southern Cross reported it had already 19 homes rated “zero stars”. It has been announced that 3,000 jobs will be cut in an effort to return to profitability- and with it a reduction in the level of care offered to residents.

Efficiency

The private firms that the government wants to run most of the NHS functions under its ‘any willing provider’ rule are not small enterprises, but major corporations such as Blackstone. Their purpose is not the provision of healthcare but the maximisation of profit – and they will reduce jobs and services or even declare bankruptcy when profits fall.

But the argument in favour of the public sector is not confined to these extreme cases of asset-stripping induced crisis. In all the ideological campaign against the NHS a central truth is obscured- the NHS is more efficient than private sector healthcare. This is illustrated in the chart below reproduced from the OECD’s European Health At a Glance 2010.

The chart shows the correlation between spending on health in a number of European countries versus healthy life expectancy at birth. As would be expected, the general rule is that the greater the spending on health the longer the healthy life expectancy in each country. (The R2 corrrelation of 0.33 in the top left hand corner means that higher spending accounts for two-thirds of the difference in life expectancy, as a perfect correlation would be 0.50).

Figure 1

Inevitability there is some variability around the central trend. Some of this will be to do with the stage of economic development and location, such as the Mediterranean countries’ better health outcomes.

But if we examine the Northern European developed economies there are three which are significantly above the correlation line, which means that they have an above-average life expectancy relative to the amount of health spending, and there are three significantly below. The three above the line are Britain, Sweden and Denmark. The three countries below the line are Austria, Germany and Finland.

Therefore, strictly speaking the first group of three countries is much more efficient in its health spending- they achieve above-average outcomes relative to expenditure. This includes the NHS. The second group of three countries is relatively inefficient, achieving worse health outcomes relative to health expenditure.

This is explained by who is spending the money, and what it is being spent on. In Britain, Sweden and Denmark the public sector accounts for an average of 81.6% of all spending on health. In Austria, Germany and Finland the public spending sector funds an average of 75.9% of all healthcare provision.

These are significant sums – with annual public spending in the first group amounting to €2,819 per person, while in the second group it amounts to €2,331 per person (adjusted according to OECD Purchasing Power Parities , Tables 4.1.1 and 4.5.1).

It should be stressed that this is not a function of the first group spending more money – they spend less. The average total spending, both public and private sector spending of the higher longevity countries is €2,920 per person per annum. Total spending in the second group is higher at €3,066 per annum.

Public health spending in these EU countries is clearly more efficient than private health spending.

Furthermore, it is clearly more efficient in terms of treatment and care. The average life expectancy at birth (women and men combined) is exactly the same for both groups at 79.5 years (Table 1.1.1). But the average healthy life years expectancy for the first group is 68.0, while for the second group it is just 56.9, with none above 60 healthy life years. These are enormous differences in tens millions of people’s lives.

Source of Inefficiency

It is well-known that the US healthcare system is almost entirely private. As SEB has previously pointed out, the US system is much more inefficient than the NHS – with the same life expectancy and proportionally the same number of health care professionals, while devoting almost twice as much of GDP to healthcare spending .

A recent explanation for part of this discrepancy comes from The Economist magazine, which has great relevance for the current attack on the NHS from the Tory-led government. It argues that the centralisation of drug approval and purchasing by public bodies is vastly more efficient. The alternative US system means private sector drug producers are spend enormous sums marketing their products to a decentralised multitude of purchasers, equivalent to local GP consortia in this country. These costs are of course passed on, and the drug purchased is frequently the one with the largest marketing budget, not the most effective one. This inefficiency is replicated at every level of input for the private US healthcare system

The principles of public sector relative efficiency apply to the delivery of virtually all public goods, not just health, but also education, housing, transport, infrastructure and services such as post and banking. Marketising and privatising the NHS is not only a threat to the quality of healthcare for millions of people, but a hugely inefficient step backwards.

T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com4

Fall in unemployment is likely to be temporaryBy Michael Burke

The latest data show a fall in the UK unemployment rate to 7.7% and an increase of 36,000 in the employment total. This is the fifth consecutive quarterly fall in the unemployment rate, which peaked at the end of 2009.

However, even the Tories constrained their boasting about the data, with employment minister Chris Grayling saying only that it “was a step in the right direction”. Neither Cameron nor Osborne made any pronouncement at all on the employment release.

The caution is well-advised. Economists generally regard unemployment as a lagging indicator of activity. That is, unemployment responds after changes in output with a time lag between the two. So it is often the case that unemployment will continue to rise even after a recovery has begun. This is mainly because there is an inevitable delay between a business reaching a decision to hire more workers or open a new factory or shop and the new workers starting their employment.

This is illustrated in the chart below, which shows the unemployment rate (red line) and the year-on-year growth in GDP (blue line). For example following the recession of the early 1980s the unemployment rate carried on rising for another 21/2 years. Similarly, the jobless rate continued to rise for over a year after the end of the recession in the early 1990s.

Figure 1

A number of analysts have noted that the rise in unemployment in this recession has been more muted than in either the Thatcher or the Major recessions – when the unemployment rate rose by 5.6% and 3.2% respectively. The increase in the unemployment rate in this recession was 2.1%, with the Office for National Statistics providing the official assessment that this is particularly striking as the loss of output in this recession of 6.4% is nearly as large as the other two combined (7.1%) .

A crucial difference is politics. The policies of both the Thatcher and Major governments’ were to engineer a rise in the unemployment rate in order to drive wages down and profits up. If there is any doubt on this question, it should be dispelled by this 1 minute video interview with Sir Alan Budd, Thatcher’s chief economic adviser .

By contrast, no Labour government maintaining any link with the unions could hope to set out on the same path and survive. Labour politicians who did adopt these policies such as Ramsay MacDonald and Philip Snowden had to break with Labour to implement them.

It is not surprising that the official analysis of the subdued rise in unemployment in this recession should neglect this determining political factor. But it also overlooks an important aspect of the most recent trends in unemployment.

Crucially, the rise in unemployment from its cyclical floor of 4.8% began in the second half of 2005, nearly three years before the recession began. This is a much longer period than ahead of either the Thatcher or Major recessions, when unemployment began to rise about a year before recession. From mid-2005 onwards overall employment growth failed to keep pace with the natural growth of the workforce over the period. This applied to nearly all categories of employment, including public sector health, education and administration jobs, which grew a little over 2% between mid-2005 and the beginning of the recession in the 2^nd quarter of 2008. This was approximately one-third of the pace required to prevent a rise in unemployment. The three exceptions to this general picture were real estate jobs (but not finance jobs) which grew by 20% over the period and manufacturing and private sector administration jobs, which both saw outright falls in employment.

In short, parts of the private sector were shedding jobs in order to boost profitability. The rest of the private and the public sector were not growing fast enough to absorb these or the natural growth in the workforce. This rise in unemployment was taking place an exceptionally long period before the recession began. This may help to explain why the decline in jobs was more subdued when the recession actually did begin.

The recent improvement in both employment and unemployment simply reflects the lagged effects of last year’s growth. If previous patterns are repeated this improvement may last another quarter or two. But the economy has already begun to stagnate under the weight of Tory cuts and these will be much deeper this year. Therefore the jobless totals are likely to rise once more as government policy takes effect- especially as driving down wages is an aim of policy.

A rational policy based on optimising growth would be set out to reverse these negative trends on a sustained basis, with a goal of full employment. That is the surest way to maximise the well-being of the population, and, not incidentally the best means also of reducing the public sector deficit.

T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

yesFall in unemployment is likely to be temporaryBy Michael Burke

The latest data show a fall in the UK unemployment rate to 7.7% and an increase of 36,000 in the employment total. This is the fifth consecutive quarterly fall in the unemployment rate, which peaked at the end of 2009.

However, even the Tories constrained their boasting about the data, with employment minister Chris Grayling saying only that it “was a step in the right direction”. Neither Cameron nor Osborne made any pronouncement at all on the employment release.

The caution is well-advised. Economists generally regard unemployment as a lagging indicator of activity. That is, unemployment responds after changes in output with a time lag between the two. So it is often the case that unemployment will continue to rise even after a recovery has begun. This is mainly because there is an inevitable delay between a business reaching a decision to hire more workers or open a new factory or shop and the new workers starting their employment.

This is illustrated in the chart below, which shows the unemployment rate (red line) and the year-on-year growth in GDP (blue line). For example following the recession of the early 1980s the unemployment rate carried on rising for another 21/2 years. Similarly, the jobless rate continued to rise for over a year after the end of the recession in the early 1990s.

Figure 1

A number of analysts have noted that the rise in unemployment in this recession has been more muted than in either the Thatcher or the Major recessions – when the unemployment rate rose by 5.6% and 3.2% respectively. The increase in the unemployment rate in this recession was 2.1%, with the Office for National Statistics providing the official assessment that this is particularly striking as the loss of output in this recession of 6.4% is nearly as large as the other two combined (7.1%) .

A crucial difference is politics. The policies of both the Thatcher and Major governments’ were to engineer a rise in the unemployment rate in order to drive wages down and profits up. If there is any doubt on this question, it should be dispelled by this 1 minute video interview with Sir Alan Budd, Thatcher’s chief economic adviser .

By contrast, no Labour government maintaining any link with the unions could hope to set out on the same path and survive. Labour politicians who did adopt these policies such as Ramsay MacDonald and Philip Snowden had to break with Labour to implement them.

It is not surprising that the official analysis of the subdued rise in unemployment in this recession should neglect this determining political factor. But it also overlooks an important aspect of the most recent trends in unemployment.

Crucially, the rise in unemployment from its cyclical floor of 4.8% began in the second half of 2005, nearly three years before the recession began. This is a much longer period than ahead of either the Thatcher or Major recessions, when unemployment began to rise about a year before recession. From mid-2005 onwards overall employment growth failed to keep pace with the natural growth of the workforce over the period. This applied to nearly all categories of employment, including public sector health, education and administration jobs, which grew a little over 2% between mid-2005 and the beginning of the recession in the 2^nd quarter of 2008. This was approximately one-third of the pace required to prevent a rise in unemployment. The three exceptions to this general picture were real estate jobs (but not finance jobs) which grew by 20% over the period and manufacturing and private sector administration jobs, which both saw outright falls in employment.

In short, parts of the private sector were shedding jobs in order to boost profitability. The rest of the private and the public sector were not growing fast enough to absorb these or the natural growth in the workforce. This rise in unemployment was taking place an exceptionally long period before the recession began. This may help to explain why the decline in jobs was more subdued when the recession actually did begin.

The recent improvement in both employment and unemployment simply reflects the lagged effects of last year’s growth. If previous patterns are repeated this improvement may last another quarter or two. But the economy has already begun to stagnate under the weight of Tory cuts and these will be much deeper this year. Therefore the jobless totals are likely to rise once more as government policy takes effect- especially as driving down wages is an aim of policy.

A rational policy based on optimising growth would be set out to reverse these negative trends on a sustained basis, with a goal of full employment. That is the surest way to maximise the well-being of the population, and, not incidentally the best means also of reducing the public sector deficit.

T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

Inflation impoverishes the vast majority

By Michael Burke

The latest monthly data show the annual pace of UK inflation accelerating to 4.5% in April, using the Consumer Price Index (CPI). The broader measure of inflation in the Retail Price Index (RPI), which also includes housing costs moderated a little, to 5.2% from 5.3% in March.

The impact of these prices increases is severe. At the end of 2010 the annual level of all wage compensation in the UK economy totalled £800bn. In the February data, average weekly earnings grew by just 0.9%. If sustained the decline in real wages would therefore amount to 4.3%.

For comparison if a decline of 4.3% in real wages were directly translated into total employees’ compensation it would amount to a £34bn annual reduction in incomes. This compares to the government’s already enacted tax increases of £3.8bn and spending cuts of £5.5bn in the previous Financial Year (FY) and £20bn in taxes and £22bn in cuts in this FY.

Unlike the cuts, inflation affects all sectors of society, especially those on low or fixed incomes, in addition to those in the public sector who are seeing their pay fall through a wage freeze and increased pension levy.

Usually the group on fixed incomes would include those receiving the state pension. However for reasons of political calculation, the government has chosen to offer a ‘triple-lock’ on pensions, so that pensioners will receive the highest of earnings growth, the RPI or 2.5%. However it was hardly envisaged at inception that this could mean a pensions increase of perhaps 6% just to keep pace with the RPI. Both the June 2010 and March 2011 Budgets assumed that there would be no additional cost to this policy in the current FY. But if the overshoot in inflation is in line with the Bank of England’s latest quarterly Inflation Report, then the cost to the Treasury will be £2.9bn in this year alone – without leaving pensioners any better off.

If the real aim of policy was to reduce the budget deficit reduction, the government approach would be utterly self-defeating. The rise in pensions and other welfare benefits (although most of these have now been switched to a link with the persistently lower CPI) automatically triggered by higher inflation will cause significant increases in net government outlays, even while entitlements are being cut.

Yet government policy is itself largely responsible for the overshoot in inflation. The chart below is taken from the latest official publication for the Office for National Statistics (ONS). In addition to CPI inflation, which is currently at 4.5%, two other measures of inflation are shown. The CPIY measure shows price increases excluding the direct effect of changes to indirect taxation, such as VAT. This is currently rising at a pace of 3%. The CPI-CT measure is the same as CPI but is adjusted as if all taxes were unchanged during the latest 12-month period (for example, excise duty rose on alcohol and tobacco in the March Budget and these are excluded). This is currently rising at a pace of 2.8%.

Figure 1

The Bank of England’s medium-term target is a 2.0% inflation rate with a tolerance zone 1.0% either side of that central aim. A large part of the current overshoot is a direct effect of government policy, which will also have greater indirect effects too. On both the CPIY and CPI-CT measures which exclude the direct effects of government policies, the inflation rate would be within the target range.

This matters primarily because both the latest data and the Bank’s Report have raised expectations that there will be interest rate increases before the end of the year. At the time of writing the interest rate futures market was pricing in two rate hikes by year-end to take official rates up to 1%.

Government hopes for economic recovery are largely pinned on the ability of very low interest rates to support borrowing by companies and especially households while the cuts are pushed through. If the prop of low interest rates is kicked away the economic outlook will deteriorate sharply. Yet it is in the government’s own hands to lower the inflation rate by reversing the rise in VAT. They could also scrap the rules that allow permanent above-inflation prices rises for the privatised utilities and rail companies, which are set to lead to price rises of up to 14% later this year .

At the turn of the year higher inflation led to calls for significant rate increases and a campaign for a higher pound which Osborne and Cameron were keen to lead. Sterling climbed sharply, as Figure 2 below shows.

Figure 2

But that campaign was punctured by publication of the stagnant GDP data for the latest 6 months. Now there is a gradual realisation of how weak the economy is and sterling finds little support from higher prices or the expectation of higher rates, as the chart shows. Instead the talk has shifted to ‘stagflation’ the combination of economic stagnation and rising prices .

That stagflation is even a possibility after one of the most severe economic contractions on record is itself a damning indictment of policy. Recessions should lead to large excess capacity in the economy allowing a rapid rebound without producing price pressures. Now a combination of government spending cuts, chronically weak investment and excessive monetary creation have created the opposite; flat activity and soaring prices.

The opposite policy is required to produce non-inflationary growth, centred on increased government spending and investment.T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com1

Problems deepen at Lloyds Bank – but it could be part of the solutionBy Michael Burke

The initial market reaction to the announcement that Lloyds Bank had made a £3.5bn loss in the first quarter of this year was for the share price to fall by nearly 6%. Every British taxpayer has a material interest in Lloyds as the state effectively controls it through a 41% shareholding.

At the time of writing the share price had fallen to a little over 54p per share, whereas the average purchase price by the state was 68p – see Figure 1. Taxpayers are now nursing direct paper losses amounting to nearly £1bn on the share purchases. However this is a tiny fraction of the total costs incurred by the state in bailing out the banks, which has mainly been in the form of providing funds to the stricken banks rather than share purchases.

Figure 1 – Lloyd’s Bank Share Price

According to the Office for National Statistics (ONS) the total debt incurred in ‘financial market interventions’, that is the bank bailout, was £1,335bn, significantly more than the level of state debt incurred via spending and taxation which currently amounts to £903bn.

For all the lurid headlines about both, the debt and the budget deficit actually fell in the last Financial Year (FY) from £156bn to £141bn under the impact of the recovery fostered by Labour’s increased spending – which has now stalled under the Tory cuts. Similarly, the debt level, excluding the bank bailout,t amounts to 59.9% of GDP which is fractionally below the Maastricht Treaty limit and lower than British public debt in every year between 1916 and 1970.

A chunk of Lloyds’ net loss come from a charge of £3.2bn from the miss-selling of payment protection insurance to individuals, many of whom could never have claimed on the insurance. Many other High Street banks are also guilty of the same swindle. Even so, without this charge there would still have been a loss compared to a profit of £721mn in the previous year.

This renewed loss is a product of the banks own current business practise. Income fell 20% as it reduced its assets and curbed its lending. However, losses on its existing loans are increasing (to £2.6bn in the latest quarter) as borrowers continue to struggle and the economy stagnates. In effect this is a policy of hoarding its capital and hoping that something positive will turn up which will improve the existing loan book. However, this is also the policy of all the other banks too and total bank lending to non-financial businesses and individuals has fallen by £74bn in March from a year ago, which was itself £102bn lower than the previous year.

Worse, government policy now exacerbates this trend as it also cuts spending and investment and makes incredible forecasts that something (net exports?, business investment?) will turn up. As a result of capital hoarding and reduced government spending, nothing is turning up.

But Lloyds, in common with the other High Street banks has considerable capacity to increase its lending. SEB has previously shown that the banks are sitting on large capital assets which could be used to increase loans. The Financial Service Authority (FSA) has performed rigorous ‘stress tests’ on all the major banks. The stress test show what would happen to the banks’ balance sheets from a series of events which include a double-dip recession, a rise to 12.5% unemployment, a further 60% fall in house prices and default by one or more European government. Even if all of these events happened simultaneously the FSA estimates that Lloyds Bank would have Tier 1 capital equal to 9.2% of its assets to act as a cushion against losses, compared to 8.0% set as the international standard. Lloyds is actually the weakest of the banks on this measure.

Even so, this implies that Lloyds could increase its lending by 15% and still meet international safety limits for its capital under an extreme economic scenario. The current policy of hoarding capital and accumulating losses is having the opposite effect, the Tier 1 capital ratio fell by 0.2% in the quarter. The bank is becoming more, not less risky as a result .

The opposite approach would be one which benefitted Lloyds shareholders (including the state) and the whole economy. This would be driven by a sharp increase in productive lending, with a positive investment return. Here the role of government is decisive. It could instruct Lloyds to make a sure-fire investment in state-owned housing. The housing shortage in Britain is both chronic and acute, with the lowest number of homes built in 2010 since 1923. 1.8 million households are on council waiting lists and even those who could afford to buy a home cannot find the mortgage financing, where Lloyds has led the way in reducing its lending.

A state-led investment programme in housing, in conjunction with local authorities and financed by state-controlled banks, could produce affordable homes yielding 6% or 7% a year in rents, double the government’s cost of borrowing and so provide a net return to invest further, or to reduce the deficit. Ed Balls has previously called for £6bn investment in 100,000 new affordable homes. This could be done via the State-controlled banks without any increase in borrowing at all. It would also create 750,000 new jobs in a sector decimated by unemployment. 750,000 new jobs would also have a twofold benefit to public finances, much higher tax revenues from both income and consumption and much lower welfare payments.T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

The IMF’s prediction China will overtake the US to become the world’s largest economy in 2016 – chartThis is a link to the chart showing the IMF’s widely discussed prediction that the size of China’s GDP will overtake the US in 2016 in Purchasing Power Parity (PPP) terms.

The chart is interactive. By ticking the boxes on the left-hand side, readers can make their own comparisons. Amongst other comparisons we found interesting; China surpassed the combined economic size of Germany, France, Britain and Italy in 2010; India surpassed all these countries individually in 2006, Brazil in 2011 will have surpassed all those countries individually except Germany.

T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com1

British Economic Stagnation Caused By Tory PoliciesBy Michael Burke

The preliminary estimate of the UK’s 1^st quarter GDP showed a rise of 0.5% which exactly matched the rate of contraction in the previous quarter. Consequently over the latest six months the economy has stagnated, registering no growth at all over the period. This follows a 12-month period in which the economy expanded by 2.8%.

A number of right-wing commentators, including the Adam Smith Institute have expressed their disbelief at the data. Yet the 0.5% rise was in line with the consensus estimate by economists and, while there may well be revisions to the data in later releases, the average revision over the last five years has been negligible. This refusal to accept reality is a function of adopting an economic framework that does not correspond to reality.

The initial release focuses solely on output measures of growth – income and expenditure measures will follow in May and June. But it is clear from the output data alone that the government policy of cutting investment has been decisive in the stagnation.

When the Tory-led coalition took office the economic recovery was expanding. In mid-2010 the economy expanded by 1.8%. Of this increase 0.3% was accounted for by a rise in manufacturing, which was mainly a function of the pick-up in world trade and the depreciation of the pound. But the biggest contributors to growth were all government-related. Current Government spending on services such as health and education directly contributed 0.2% of that growth. The state-supported finance sector contributed another 0.5% and the construction sector contributed 0.6%. SEB has previously shown that government construction spending both before and during that period led an increase in private sector investment. Therefore both directly and indirectly, government activity contributed 1.3% of 1.8% growth in mid-2010.

But the effect of Tory led coalition policy has been to reverse that increased government spending. Contrary to those who cannot accept reality, government activity has three effects on GDP; directly, through its own spending; indirectly as its activity causes the private sector to alter its own spending, and an ‘induced’ effect as sectors of the economy not directly related to government activity are affected by changes in spending (for example, consumer spending by workers in firms that supply to government).

When the further date releases are published, it will be possible to analyse this dynamic in greater detail. But it is already clear that government investment fell after the June 2010 Budget and just three months later the economy began to contract. A key area was the fall in government construction spending. The latest data show public construction investment falling by between 13% and 19% from a year ago, depending on the secto. While increased government activity has a triple benefit to the economy, this cut in spending will have had a threefold negative effect on economic activity.

The 1^st quarter 2011 data mark three years since the recession began. This should be a period of robust and above trend growth. Instead government policy has produced stagnation. The chart below shows the change in economic activity from the peak prior to recessions.

Figure 1

In this business cycle it is now 36 months since the recession began and the latest data leave the economy still 3.5% below its prior peak. The only cycle where activity was lower at this point was in the Great Depression of the 1930s (-5.2%). The current cycle is more severe than the next sharpest recession, under Thatcher in the early 1980s, when output was 2.8% lower than the peak level after three years.

In both the downturn of the 1930s and that of the 1980s output was back to its previous peak after four years. This is just one year away in the current cycle and to match that now the economy will have to grow by 3.5% over the next 12 months – which would represent a wholly extraordinary acceleration from present stagnation. Even the Office for Budget Responsibility, whose remit seems to include rosy forecasts, is only forecasting growth at half that rate this year. Anything below 3.5% means that this business slump will exceed even that of the Great Depression, at least in duration although not in severity.

Another deeply worrying aspect of the data is that the economic stagnation arises from £9.4bn in fiscal tightening in the Financial Year just ended, £5.5bn of which was spending cuts. The government plans £41bn of fiscal tightening in the 12 month period beginning in April. New Labour had planned £26bn of fiscal tightening this FY, £14bn of which was spending cuts. Continued support for slower, slightly shallower cuts is not tenable given the evident negative impact of much smaller cuts so far.

There is always the possibility of unforeseen events, perhaps a collapse in the currency or a build-up in unwanted inventories either of which might statistically boost GDP without altering the underlying picture of extreme weakness. But outside of these quirks it seems that the best that can be hoped for is a prolonged economic stagnation. A policy-induced return to recession, a ‘double-dip’ cannot be ruled out. It seems certain that employment will fall once more and tax revenues decline. Both of which will lead to a widening of the public sector deficit, contrary to the claims of the government and its supporters. Instead of these, seriously rescuing the economy, creating employment and reducing the deficit will all require a complete change of policy.T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

Poland Escapes Recession By Public InvestmentBy Gavin Rae

Prior to being elected Poland’s Prime Minister in 2007, Donald Tusk declared that he wanted to repeat the ‘Irish economic miracle’ in Poland. As Tusk comes to the end of his first term in office, he can claim that an ‘economic miracle’ of sorts has actually occurred. Poland has been the only EU country to have avoided an economic recession since the outbreak of the global financial crisis. However, this relative economic success has been made possible by carrying through policies that are diametrically opposed to those being implemented in Ireland. Furthermore this is now being threatened by attempts to carry through austerity policies similar to those currently being introduced by the Irish government.

It is not the case that Poland has not suffered an economic downturn during the international financial crisis. GDP growth slowed from 6.8% in 2007 to 1.2% in 2009, before growing by more than 4% in 2010. Unemployment has risen again above 13%, with around 25% of young people now jobless. The budget deficit has risen to nearly 8% of GDP and public debt is edging towards 55% of GDP. With social inequalities widening, inflation rising faster than wage growth and public services deteriorating, Poland is far from meeting the ideas of an island of economic stability propagated by Tusk and his Citizens’ Platform (PO) government.

Yet the fact that the Polish economy has continued to expand has lessened the negative effects of the economic crisis. Why has the Polish economy continued to grow? Poland was fortunate not to have experienced a banking crisis similar to that in many other countries and entered the crisis with a relatively low level of private debt. However, the major reason for Poland avoiding negative growth has been that it has managed to increase public investment at a time when private investment has slumped.