Belfast Telegraph

Friday 19 December 2014

We can't lecture on debt, it's time to get our house in order

Barack Obama addresses the US from the White House in Washington (AP)
Barack Obama addresses the US from the White House in Washington (AP)

The events in Brussels and Washington last week were indeed dramatic but the substance is mundane: what is the mechanism whereby some taxpayers are persuaded to part with more of their money and others to receive fewer services from governments, in order that the mathematics of public finance balance?

You cannot magic real resources from thin air and European and American citizens are going to get a worse deal from the state. The issue is how to share the burden between countries, between people within those countries and between the present generation of earners and future generations. The rest is just detail.

However, the scale of the burden is crucially dependent on the medium and long-term rate of growth of the respective economies. With decent growth the burdens become tolerable; with stagnation or worse they become very difficult indeed.

There does seem to be some sort of slowdown happening. It's happening in Britain, Europe, the US - and in China too. This is not, or at least not yet, a double dip but it is certainly a pause and one coming early in the recovery phase of the cycle. This is not unprecedented, for you often do get pauses such as this. But after such a deep downturn you would expect a stronger bounce than we have had.

How bad is it? Well, let's start with Europe. The best forward indicators are generally accepted to be the various purchasing managers' indices (PMs), where companies report what they expect to happen to sales, employment, prices and so on in the months ahead.

The latest eurozone "flash" PM, was out last week and it unexpectedly dipped. It looks as though the eurozone economy may barely grow in the next few months. We don't know to what extent this dip is associated with the debt worries or whether it indicates some wider malaise. It is probably a bit of both.

A commonsense response would be that the weaker economies are suffering from worries about the squeeze on their economies imposed by the need to get debts under control, while the stronger ones, notably Germany, are suffering from flatter demand for their exports from the rest of the world.

The eurozone is clearly facing a slowdown. So, too, is the US. Here there is, of course, the long drawn-out debate in Congress about the Federal debt ceiling, with the Government supposedly running out of money on August 2. But I don't think that is really the cause of the slowdown. The immediate problem is that the economy still seems incapable of creating enough jobs.

My instinct is that the indicator to look at will be the housing market. Once confidence returns to the market, and housing starts have been up in the past few months, then confidence will slowly return. But this will take another year or so.

All this creates uncertainly for us. A couple of bits of iffy data came out yesterday and show we're barely any closer to closing the deficit than we were a year ago. On retail sales the thing that is really interesting is how rising food and fuel prices have hammered our standard of living. Commenting on this, Capital Economics reckons that an early start to the summer discounting season is an important reason behind a bounce in sales.

As for the borrowing numbers, I am afraid that the first three months of this year are nearly as bad as last year: a deficit of £39.2bn against £39.5bn then. Fortunately, tax revenues are not too bad and it may be that spending can be reined in a little as the year progresses, but getting the deficit down from last year's £142bn to the target of £122bn will be a struggle. Most Britons don't realise that our Government is still borrowing more as a proportion of GDP than any major European country. There should be no crowing about what is happening across the Channel. And this is not just because a fall-off in export demand damages our companies, but because our own fiscal correction has hardly begun.

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