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Rebooting the UK economy: the options remaining

‘Monetary and fiscal policy in the United Kingdom can only do so much,’ Mervyn King said last night. But is the UK really out of options?

 
Rebooting the UK economy: the options remaining

‘Monetary and fiscal policy in the United Kingdom can only do so much,’ Bank of England governor Mervyn King said last night. But is the UK really out of options?

An economy off the rails

As King said, the UK economy has ‘gone off track’.

Domestically there aren’t enough jobs, and those people who are employed aren’t seeing their wages rise – or certainly not enough to keep up with rising inflation, which shot up to 5.2% on the CPI measure in September.

Rising inflation means that savers and investors are hard pressed to prevent their money losing its value. Inflation will fall back, but until it does it remains particularly painful for pensioners who depend on a regular income. Nor are annuity rates doing the retired any favours, worsened by the impact of quantitative easing.

Those who have yet to buy an annuity, such as people nearing retirement age, will see that pension schemes are increasingly falling into deficit as stock market declines take their toll.

Meanwhile, the pressure on households grows. Utility companies, in pursuit of record profit margins, will stretch household budgets to their breaking point over the coming months with their double-digit price hikes.

None of this is good for consumer confidence, which has resulted in less spending on the high street, where sales figures have been fairly flat. The embattled retail sector now also says it faces a £350 million jump in bills next year as a result of yesterday’s inflation reading.

The only really good news for consumers, according to Howard Archer of IHS Global Insight, is that the Bank of England is clearly not going to raise interest rates for a long time. Great for borrowers, but savers are subsidising them.

This is framed by the European, and global, crisis, which poses a threat to UK exporters, and makes for poor-performing financial markets. Here though, there has been some good news, with Office for National Statistics figures showing that exports by UK companies rose to £25.5 billion in August, the most since (comparable) records began back in 1998.

Economists are doubtful that will last though. So much depends on European leaders’ ability to fix the eurozone crisis, with this weekend’s summit a potential turning point.

This uncertainty, coupled with weak domestic demand, means that UK business investment remains below its pre-Lehman peak, according to a report from Ernst & Young’s respected ITEM Club economists today.

During all of this, politicians and policymakers have embarked on a scorched earth policy, seemingly unleashing the entire economic arsenal. What is left to them?

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33 comments so far. Why not have your say?

John Symons

Oct 19, 2011 at 17:22

Freudian typo at the end there? If we are taxing cooperation (possible, we do tax everything else) we should cut that tax right away.

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Chris Marshall (Citywire)

Oct 19, 2011 at 17:27

Nice spot John, that's corrected.

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easy life

Oct 19, 2011 at 20:54

There needs to be more pain before gain. We have spent more than we earn in the western world, that needs to be rebalanced. So 10-20% reduction in living stds is necessary, after all it was only borrowed money we were spending.. Lets not kid ourselves take the pain now all the QE and drip feeds into the market are prolonging the agony and will ultimately make it worse.

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Jonathan

Oct 20, 2011 at 05:47

Do you think the BoE are looking back retrospectively thinking they should have had higher interest rates during the debt boom to prevent the later bust?

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Cape Town

Oct 20, 2011 at 07:06

The problem is with growth not debt and the solution is rebalancing exchange rates and strengthening weaker economies, not austerity mesures. And let the failed banks go to the wall as no point in throwing good money after bad and it is a crime to direct money to banks when it could go to developing a productive economy of the future.

In particular, and inspite of objections from free-traders and from business dependent on "exchange contracts", I would like to see the tail of the global chain oulled back into Europe, the South of Europe. By the general terms and conditions in supplier contracts, it will be possible to oblige companies in laggard countries to improve their ways of working and become competitive again.

Also agree with the need for global agreement to free currencies from all these pegs to the dollar and to break up Europe to free weaker econmies from pegs to the Euro.

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stephen57

Oct 20, 2011 at 08:43

Abolishing the minimum wage would create millions of jobs, regrow the economy and cut inflation at a stroke throughout the Western World, nothing else will work. Hey Ho here will all this end before someone realises.

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Michael Peters Fenwicks

Oct 20, 2011 at 09:11

In my opinion the only way forward is creating conditions that lead to strong business growth.

On the other hand am afraid to say that the UK once the common sense man of Europe has become very unattractive as a place to do business.

Over regulation without clear direction and so many other short sighted led nom de plume headline grabbing polices formulated by the government.

Where do I stop?

What we need is major reality check by the government telling the truth instead of creative accounting.

Less Tax, lower regulation and most importantly initiatives for business to attract more foreign/domestic investment.

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Lex Muir

Oct 20, 2011 at 09:14

Interest Rates "Great for borrowers" Who's kidding who here? There are still some borrowers on fixed or tied deals who are benefitting from 0.5% base rate, but these are fewer each month. For any others, the rates being charged are ridiculously high compared to base rate, with this being allowed by the legislators imply to allow the banks to recover their positions of power. Pension providers, at least with Stakeholder schemes, have to operate on a margin of less than 1%, whilst banks are allowed many times that. Even worse are these "pay day" loan companies charging legally allowed APR's in the thousands of percent. Where are the politicians hiding their heads, and more to the point, where are he FSA whilst all this is going on?

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steven fieldfare

Oct 20, 2011 at 09:24

An option not covered is selective capital investment.

Defence has clearly been run down too far to protect our interests. We are gambling that we can opt out of unforseen crises or shield ourselves behind the US.

There is some historical evidence that increasing the proportion of GDP allocated to defence could spur growth if spent nationally. While not suggesting that we go as far as Germany in the 1930s or the US in WW2, both economies grew from military spending.

Capital investment in our rundown infrastructure, although likely slower to come online, would also help growth along - in its own right and increasingly as a multiplier when other parts of the economy strengthen. Did not Roosevelt's New Deal use this strategy?

Achieving leverage or multiplier effect from capital investment would be key. Defence and construction are manpower heavy, providing immediate employment support. Restoration of stand alone Defence Medical Services, for example, would aid construction, provide focus for the looming long term veteran care problem and, in peacetime, allow spare or overflow support for the NHS. Focusing aid programmes on construction could add scale to infrastructure programmes at home ( for example, modern factory pre-fab construction for housing and standard design public buildings - that is what happened before and after WW2 in national emergency).

Within capital investment initiatives of this sort lie potential remedies for other national ills if played properly: tackling youth unemployment; providing disciplined workforces in national civilian or military service; apprentice and OJT trade skills and experience; and increased capacity to support elderly care. Above all, there is potential for "Keynsian" financial gain through interactive investment between the big spenders of health, defence, infrastructure and aid.

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Anonymous 1 needed this 'off the record'

Oct 20, 2011 at 09:26

Hows about stopping supporting over inflated assets, zombie banks and organisations. Let the free market take its course

debts repaid, bankruptcies etc

Then the growth cycle will start again.

Only in economics do we expect up without down.

More QE wont work - inflation is killing ordinary people and our crap currency makes all that we import more expensive.

Thick or what!

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Anonymous 2 needed this 'off the record'

Oct 20, 2011 at 09:38

Stephen57 is spot on.

The BoE has finally admitted that we need to rebalance the economy though their solution of asking China/Germany/Japan very nicely if they wouldn't mind awfully starting importing our goods and not just selling us theirs is a little hopeless.

No we need to drop the minim wage so we can start manufacturing things again and we already have a weaker pound (QE helping again). If the liberals can't stopmach it they can boost tax credits to the lowly paid funded by cutting benefits (especially housing benefit which has only served to prop up the rental market).

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jeff lampert

Oct 20, 2011 at 10:06

The problem also needs to be looked at from "the bottom up".

China, half way round the world can supply us with products cheaper than we can make them: this is despite the transport costs (reliant on increasingly expensive energy) and long lead times.

WHY????

Allegedly (and simplisticly) because of cheap labour!

Who could be "cheaper" than all the kids that come out of education and finish up on the dole? If we could find ways to emply them (perhaps subsidiised as apprenticeships) we must be able to compete.

A government initiative to set up firm that compete with our imported consumer goods, properly supported with funding, will reverse the trend.

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barry slater

Oct 20, 2011 at 10:16

Interest rates not going up is good news ?

Only for some...........for those of us who have saved all our lives and

to use a word that the criminal Gordon Brown often used have been "prudent"

so as not to be a burden on the state.

We are being clobbered.

Lets have 5% back again please

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jingoistic

Oct 20, 2011 at 10:43

stephen57 & Anonymous2 Will you work for the minimum wage? If the answer is no then please do not expect others to do likewise.

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Anonymous 1 needed this 'off the record'

Oct 20, 2011 at 11:29

I'd work for the minimum wage.

But only if my cost of living particularly rent and housing costs were a hell of a lot lower. Fact is people cant afford to live for a less than minimum wage job.

Lower rents and house prices is whats needed and then lower wages could be possible.

For those who want a lower minimum wage (for others obviously). How does giving people less money stimulate consumption?

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Anonymous 3 needed this 'off the record'

Oct 20, 2011 at 11:39

This is about educating the people in the west, it is not about borrowing more huge sums (how much does China now own of the USA & UK in Govt. debt) to finance further ridiculous high expenditure in order for western Govt.'s to keep votes.

If you spend more than you earn or tax your wealth will go down, the west is now broke, i.e. we need to bring back soup kitchens and night shelters for the unemployed, not finance lavish lifestyles with ridiculous rent etc. benefits. All Govt. pensions paid should go to means tested, this for a year or more, will be a start. Government salaries should be capped at £100,000 a year and no further benefits.

Greece is finally facing the music, so will the rest of the western countries in time unless some reasonable social reform is brought in.

Time to wake up or be forced to.

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Anonymous 3 needed this 'off the record'

Oct 20, 2011 at 11:47

jingoistic...... the Govt. should let people on benefits work for the private sector at £2.50 an hour......... basically the Govt. is then subsidizing the productive sector, so the UK can start to compete again in the world markets..... it is not about working for £2.50 an hour..... those who are good enough will soon earn a lot more as the productive sector rewards productive people, the productive sector is about competition.

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Lets Face It

Oct 20, 2011 at 11:55

Well I think the 'Global Economy' is all smoke and mirrors. Its just a big bubble of debt and its bursting in slow motion.

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Anonymous 1 needed this 'off the record'

Oct 20, 2011 at 12:04

Anonymous 3 The so called "productive sector" rewards failure at the top.

mp's, FTSE executive, Bankers, Fred Goodwin, Tony Blair, etc , etc

need I go on?

Its based on greed and what it can get away with not productivity or being competitive. This myth has now been debunked by the great unravelling of the lie.

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Anonymous 3 needed this 'off the record'

Oct 20, 2011 at 13:33

Anon. 1 ...... you have to get to the top first and please note, for every corrupt overpaid 'executive' (you know them better than me) there are many more that are worth every penny, try taking time out and read 'Good Value' by Stephen Green.

If you believe in something for nothing, you living in Euroland fantasy world.

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Anonymous 4 needed this 'off the record'

Oct 20, 2011 at 13:40

The best thing would be for the UK to leave The European Union. I think everybody knows this now, with the exception of David Cameron, the Lib Dems, and maybe the Labour party.

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True Brit

Oct 20, 2011 at 15:45

Cutting corporation taxes seems a good move to me take note of the irish who have 12.5% corporation taxe and 1.6% growth. All this from a point not very long ago when they had to be bailed out.

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normski

Oct 20, 2011 at 16:00

Vat needs to be reduced to zero for all building work for a limited period, building is a very labour intensive business also the money would stay in this country unlike the scrappage scheme.

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Anonymous 1 needed this 'off the record'

Oct 20, 2011 at 16:14

Anonymous 3 I agree not everyone can be tarred with the same brush and im sure there are 1 or 2 really good ethical mp's, bankers, corporate CEOs etc. I just dont think they are the majority and it also seems like its the bad ones who drive politics and policy.

I know without a doubt that everything must be paid for its just a question of who pays, when and by how much. I dont believe that society at large should pay for the extreme greed of the few. And that includes condeming young people to less than minimum wage, high house prices, high inflation, higher education costs, the list goes on. Why should they be impoverished when they were probably still at school when this nightmare frankenstein ecomonic plan was conceived.

The villains in this drama must be sought out and brought to justice. Their ill gotten gains must also be returned. Rather like how they deal with Organised crime bosses etc. Seize assets, jail time.

Funny no ones mentioning that as a solution are they?

Just milk the innocent and least able to pay.

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Chartered Accountant

Oct 20, 2011 at 17:42

To echo the comment by Anonymous 4, I too believe that the UK should leave the European Union. As a first step, there should be a free vote in Parliament on whether or not to hold a referendum. Unfortunately despite political promises to the contrary, all of this seems unlikely. Once outside the EU the dead hand of EU bureaucracy could be lifted from the private sector which might then produce the increase in economic activity that our present government is seeking.

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James Park

Oct 21, 2011 at 12:03

I still don't think the message is getting through to the rip off merchants. For the country to start making headway there are going to have to be a lot of substantial price reductions in a host of sectors .

Make no mistake about it, this is an expensive country to live in. All of this was fuelled by 'easy money'. And that's now gone for a very long time.

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Keith Snell

Oct 22, 2011 at 10:44

As none of the answers suggested by readers is likely to happen It is becoming increasingly difficult to invest with any confidence. Those who have spent too much such as the UK can only produce policies which seek to reduce expenditure, we should be seeking to ensure we do not contribute to the euro disaster fund and increasing national investment slightly on infrastructure.

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Bob saxton

Oct 22, 2011 at 11:43

Stephen 57 has got it wrong. We should increase the minimum wage. Where will the money come from? by introducing a maximum wage. (including bonuses). We do not need a bigger cake, just a fairer share of the existing cake.

Some of the least beneficial individuals in the country, take home more in salaries and bonuses in one year than a skilled technician takes home in their working life. When one compares this to the real public service workers that do hard, dangerous and unpleasant jobs the situation is even more unfair.

I am thinking of the people that clear and maintain our sewers, remove our rubbish and provide us with clean water and power..

Bob the electrician

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snoekie

Oct 22, 2011 at 15:28

MPF, you have some good points, but essentially govts must live within their means and also stop their wastage and leave most of the money in peoples pockets.

Those that caused the problems be they politicians, banks idiot borrowers or the imprudent should be made to forfeit their assets until they damage they caused is made good.

Minimum wage rates are big problem. Just like maternity benefits, let the poiliticians pay that from their pockets and not load it onto businesses.

Govts should behave as households, spend no more than their income and never borrow more than can be sustained by the household income and not rely on businesses to make up the shortfall to fund their 'dreams'.

Many large companies should revert to days of yore, and sack incompetents and not reward failed executives, and sue the failures for the losses incurred/allowed.

BTW, more power to the shareholders on executive pay/rewards/pensions etc, discounting the voting power of fund managers.

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Michael Brooks

Oct 22, 2011 at 18:43

The governments austerity programme has so choked off the economy that the debt is hardly being paid off. Unemployment is rising while housing and fuel costs are soaring. My savings arn`t growing any more due to the miniscule interest rate, without even the saving grace of others being able to borrow, since the banks remain reluctant to lend. The government might at least see their way to subsidising the burgeoning number of food parcels being handed out to even the indigenous population. The honest truth is we are in for a long period of recession coupled with a double dose of social unrest.

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James Park

Oct 23, 2011 at 09:01

I wonder if politcians ever read the comments made by people on sites such as this. They are a very eclectic mix but there's an awful lot of excellent thought and common sense.

Those that asprire to lead our country might learn something.

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Cape Town

Oct 23, 2011 at 09:29

If debt were the real problem, why all this drive to bailout deviant nations? IT is the real economy that is the problem, with no growth and so no chance of paying off debt.

The answer is to rebalance inefficient economies by unpegging them and lowering their exchange rates. The IMF just takes from its members (4% from UK) and lends to those in need. Instead of lending to profligate governments, better to invest directly in industry. And if there isn't enough industry left, best to "inshore" the tail end of the supply chain we so foolishly sent to our competitors' home countries.

None of this will happen becausze politicains are more global than their electorates, they are prisoners of their compromises. So instead, there will plunge from recession to depression, truly massive dislocation and currency / banking collapse, and those politicans will be "ghadaffeeised".

It is happening already.

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jeff lampert

Oct 23, 2011 at 11:38

We are suffering the Chinese curse of living in interesting times:

We need to look forward, not backward: we can call Fred (Goodwin) and Tony (Blair) to answer later---please do not forget Ed (light touch regulation) Balls:

OK---How about:

1. Do a deal with the Chinese on debt forgivenes---they are more pragmatic than us, and will know the advantage of keeping their workers in jobs, rather than having several trillion dollars decreasing in value daily.

2 Turn Europe into a free trade zone, and nothing more (WOW---get rid of the euro and Brussels!)

3 Introduce "true" (and accurate) value into accounting

4 Make all banking transactions have an underlying reason (currency hedging, interest hedging ok, provided it is against a transaction, not just a punt).

5 Directors should invest (all?) their personal wealth in the company they are directing.

6. Explore every major imported item, and ask ourselves why it is better to import it from the other side of the world, bearing in mind the transport costs and the time lag meaning increased stockholding---make "localisation" the buzz word rather than "globalisation"!

Just for starters---------not possible I hear you say: but just three years ago I asked a Libyan when the Gadaffi dynasty would finish, to which the answer was never!

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