The relief’s palpable. Time and stimulus have finally done the trick. Growth is back. House prices are up again, as is consumer spending. It is as if the UK is at last waking from a terrible dream.
What happened to the UK since the start of the financial crisis in 2007 was not a figment of the imagination. The slump was brutal and the recovery slow. However, all recessions come to an end eventually. When things are at their worst, it is hard to imagine that the storm clouds will ever roll away, but they do.
Two years after the UK sought financial help from the IMF in 1976 growth was strong enough for then-British prime minister Jim Callaghan to contemplate an early election. Two years after Black Wednesday in 1992, then-British prime minister John Major was presiding over an economy expanding at annual rate of 4 percent.
London economists have been revising their growth forecasts upward for next year, but probably not yet by enough. It’s conceivable that the pre-election year could see gross domestic product rise by 3 percent.
There will be those who say that this is all an illusion — they are both wrong and right. Wrong, because it is clear from the data that the pickup is for real. Right, because growth is only meaningful if real living standards are rising, which requires wages and salaries to be going up more rapidly than prices.
For the whole of this parliament thus far, the opposite has been the case. The only comparable period in Britain’s recent history when there was such a brutal squeeze on real incomes was in the late 1970s, when the Callaghan government’s pay policy was in force.
The outlook for living standards could improve next year, because stronger demand should allow workers to secure better pay at the same time as inflation falls. This will not be enough to make good the losses since the recession began, which is why Leader of the Opposition Ed Miliband intends to make the question then-US presidential candidate Ronald Reagan asked Americans in 1980 (“Are you better off than you were four years ago?”) a pivotal part of his campaign.
However, the election should not just be about living standards, important though they are. It should be about whether there was an alternative to the policies of the past three years that would have allowed a faster recovery. It should be about having a contingency plan if the recovery proves unsustainable. It should be about whether the Britain in 10 years time is going to harness advances in science and become a high-productivity, knowledge-based economy or whether it is content to be a low-wage, low-investment country.
The government’s case is that austerity was tough, but inevitable. Any other policy would have led to Britain being targeted by bond market vigilantes, leading to higher market interest rates and even weaker growth. Reforms have been put in place to ensure the Bank of England can prevent the recovery in the housing market becoming a bubble. Supply side reforms of planning, corporate taxation, patent laws, additional public spending on science and finance from the new business bank mean the economy will gradually be rebalanced towards investment and exports.
An alternative view is provided in a new report from the Green New Deal (GND) group, of which I am a member. The GND began when a few of us — including economist Ann Pettifor, tax expert Richard Murphy and Caroline Lucas, now a Green Party MP — got together. The sense was that the financial crisis had been long in the making and would be the most profound shock to the global economy since the great depression. In some ways, the situation was worse because the banking meltdown was the first manifestation of an economy-energy-environment triple crunch that was going to confront policymakers in the coming years. The free-market right had spent years preparing for the collapse of the Keynesian model in the mid-1970s and was ready with a slate of policy ideas: cutting taxes, taming the unions, controlling the money supply and so on. The left in 2007 was bereft of big ideas.