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The economy could be growing too far and too fast

October 26th, 2013

What problems does the rapid upturn bring the government?

It seems a long time ago that the opposition, members of the media and economic commentators were speculating about the possibility of a triple-dip recession.  In fact, it’s in only six months that the economic debate has changed markedly.  Gone are the arguments about flat-lining and the need for stimulus and instead the agenda’s moved on to the cost of living.

On one level, that’s not unreasonable.  Incomes are rising more slowly than prices (never mind national output), and whatever the figures say, most people don’t feel better off – though they’re getting more confident that they will be in the future.  On the other hand, it’s somewhat disingenuous of the opposition to blame the government for that rising cost of living when a large part of the reason was the excessive borrowing that took place under Labour, which now has to be serviced if not paid off, and where closing the structural deficit inevitably means real-term cuts or increased taxes somewhere.  That’s politics.

During the politics of austerity, that was understandable and many people accepted that on an intellectual level, if not always on a personal or emotional one.  However, that changes if there’s now supposed to be real, sustained growth.  If living standards continue to decline or stagnate, the public will no doubt ask why they’re not getting a part of it.  Wind the clock back before the recession and George Osborne talked a lot about sharing in the proceeds of growth.

Maintaining that balance between cutting the deficit further and satisfying those who feel they’ve done at least their bit in helping sort the situation out will be no easy task.  Public sector workers whose pay has been cut in real terms (even after increments) are likely to become more vocal.  Demands for relief from energy costs, fuel prices, council tax and various other things the government can affect will increase if there’s a belief there some money to go about.  There may be a greater sense of injustice about cuts which are implemented.

At the other end of the scale, events may push the Bank of England into raising interest rates next year, whatever Mark Carney’s forward guidance might have been.  With inflation still above target, unemployment falling steadily and growth now seemingly well established, the necessity for the lowest interest rate in over 300 years is harder to sustain – a point pensioners and pension-fund managers might increasingly make.  Mortgage holders, by contrast, may have become quite accustomed to these levels over the last four years and increases (whether by increases in the official rate or prompted by reversing the QE programme), could come as a bit of a shock.

The debate about austerity isn’t going to go away, not while the deficit remains so big.  The nature of it will, however, change.  The risk for the Tories is that they are cast, and cast themselves, as the misery party.  The risk for Labour is that the extra money tempts them back into being the irresponsible spendy party.  The risk for the Lib Dems is that they get bypassed altogether.  I suspect a few 2015 election plans are being rethought.

David Herdson