The days of easy money are over. And Britain is likely to suffer more than most other developed economies:
- The City and financial services have been a key driver of our growth, reaching around 10% of GDP (see this blog)- now reversing
- Our housing market is one of the most overvalued in the world - 30% according to the IMF (see this blog) - now reversing
- Our fiscal deficit is already bigger than any other major economy (% of GDP), and it's now going to soar - severely limiting the scope for any fiscal boost
The best guess is that we're once again facing 5-10 years of economic stagnation - more like the 70s than the 30s, although given the circs, nobody can rule out far worse outcomes.
That's a world in which "sharing the proceeds of growth" is not a sustainable fiscal strategy: quite simply, there is no growth to share.
So what to do?
Today's Times reports on George's forthcoming Conference speech:
"Mr Osborne will savage as “grossly irresponsible” any attempt by Mr Brown to borrow his way out of trouble. Instead, he will unveil details of a new set of rules, policed by an independent body, aimed at bringing debt down. “It is a forward-looking fiscal policy that is at the forefront of academic thinking anywhere in the world,” said one official with knowledge of Mr Osborne’s plans.
Aides also confirm that he will continue to prepare the ground to abandon a pledge to match Labour’s public spending totals. The announcement of the new framework is the culmination of a long campaign around the slogan that Mr Brown “failed to fix the roof when the sun was shining”. The decision to focus on debt was taken after Tory strategists studied the 1996 Australian federal election
campaign, The Times has learnt."
Well, rules we like. Independent "policing" bodies we like (with powers of arrest?). Abandoning Labour spending plans we like.
But tweaking Gordo's debt rule doesn't answer the big criticism of the existing framework. Which is - as BOM readers will know - the lack of that third fiscal rule directly limiting the growth of public spending (see many previous blogs eg here). And that's a rule that really is at the forefront of academic thinking, including the brainboxes at the OECD.
After a decade of rising taxes, simply stabilising the existing fiscal position is not enough. We need a clear strategy for cutting taxes in a world of economic stagnation. That in turn means a programme to cut public spending as a percentage of GDP.
Just like in the 70s/80s, public spending must be hacked back to make room for wealth creation. It's painful, but it has to be done.
Now, is George going to do the biz?