In the UK the Chancellor made his Autumn Statement yesterday updating Parliament and the electorate on the economic woes.
Things don’t look good and it’s hard to see how the UK can keep its AAA credit rating that keeps government interest rates down.
The basic message is that government spending is high while tax receipts are low. This means the annual public spending deficit will stay with us for many years to come
All the time the accumulated national debt is increasing and will create a huge burden when interest rates are forced up in the international money markets.
The unfriendly squeeze on lower government spending and higher tax rates is going to keep any feel good factor away for years.
The current coalition government between the Conservatives and Liberal Democrats and the next Labour government will be forced to do the opposite to what they want to do.
Perhaps I’m being unduly pessimistic but there seems to be an automatic assumption that the economy will return to the average growth rates of the past — about 2.5 % per annum.
The Underlying Causes Of Economic Growth
Economic growth is usually defined as the annual percentage change in gross domestic product (GDP) after adjusting for the increase in monetary values caused by inflation.
This is an assessment of how much the country has produced of value in a year.
It’s quite a hard concept to think about beyond the abstract level.
Does a nurse looking after sick patients add to GDP? Yes she gets paid although the NHS is funded by the taxpayers. But what about a relative who acts as an unpaid carer for an ageing parent?
Fundamentally there are only two ways to increase GDP
- To have more people in the country contributing to the economy.
- For those who are working to increase productivity.
Demographic information tells us that as the baby-boomer generation retires and life expectancies increase, there will be an increasing proportion of people who are retired. While they will create demand for goods and services, they won’t directly contribute to GDP.
In fact this generation bulge will increase the pressure on state spending on health, pensions and long term care.
Productivity of those who are working needs to increase quickly for the economy to stand still.
But there’s a fairness issue. If you work harder you want to share in the increased wealth. That’s only natural.
This increases the need for even more productivity gains.
And that means change.
But change is usually resisted. It’s scary.
It’s hard in the private sector but the balance of power between the business owners and the employees usually means that it happens. Perhaps not as much or as quickly as the business owners want but it happens.
It’s even more difficult in the public sector where union power is high and moral pressure for good causes is intense.
In 2012 the public sector represents about 38% of the economy by tax take and 45% by spending if I’ve understood the statistics correctly.
To close the annual deficit those numbers need to come together. To pay back some national debt tax needs to be higher than spending.
Can the public sector increase productivity fast enough to create economic growth? Can the private sector grow even faster to compensate?
I’m not convinced they can.
I struggle to see how we can live up to past rates of economic growth.