THE MEDIA have made much of Gordon Brown’s admission in last week’s pre-budget report that he had got his sums wrong. Most notably the government is going to have to borrow £20 billion this year and £24 billion next year – nearly twice the amounts Brown forecast only seven months ago.
But more interesting than this error is the explanation Brown gave for it. He said, ‘Twenty of the world’s biggest economies accounting for 60 percent of the world’s output – the United States, Japan, much of Europe and Latin America – have been or are in recession after the sharpest slowdown in global economic activity for almost 30 years, indeed the biggest contraction in industrial output in the world’s major economies since 1975.’
Britain has been affected by this global recession. The Treasury now expects the British economy to grow by only 1.6 percent this year, down from the 2 to 2.5 percent that Brown predicted in last spring’s budget. A lower rate of economic growth means lower government tax revenues than expected. Rather than cut public spending Brown has decided to borrow more instead.
But hang on a minute… ‘the sharpest slowdown in global economic activity for almost 30 years’? Aren’t these the words of the same Gordon Brown who used to intone regularly, ‘No more boom and bust’? Brown used to claim that he had discovered the economist’s version of the philosopher’s stone.
He had devised a set of policies that would free Britain from the cycle of boom and slump that simpler-minded souls such as Karl Marx and the right wing liberal Friedrich von Hayek believed to be inherent in capitalism as an economic system. Never mind that the content of these policies, for example handing control of interest rates over to the Bank of England, were largely pinched from the neo-liberal Washington Consensus.
As long as the British economy grew relatively fast, as it did through much of the 1990s, Brown’s reputation as the ‘Iron Chancellor’ seemed invulnerable. Even now he continues to boast about the success of his policies. ‘Taking growth last year, this year and next year together, Britain is not the weakest but the strongest of the major economies,’ he said.
This claim requires us to accept that Treasury forecasts that have so recently been proved wrong will turn out better next time. At best it means that British economic growth won’t be quite as bad as that elsewhere.
If we look at other figures, the picture is much grimmer. Britain’s productivity growth has lagged chronically behind that of the other major economies. The day before the pre-budget report the Treasury announced that business investment fell by 13.4 percent in the third quarter of 2002.
The Financial Times commented, ‘The fall was steeper, and investment as a share of national income is lower, than in the recessions of the early 1980s or the early 1990s.’
This drop in investment was also worse than the falls in the US or Germany. All the same Brown insisted that ‘next year in 2003 Britain and North America are now forecast, even in a still uncertain and unstable world, to continue to be the fastest growing of all the major economies.’
This linking of British and US fortunes gives us the key to Brown’s outlook. Underlying his resistance to Britain joining the euro is the belief that US-style free market capitalism is the best economic model.
That Brown holds firm to this belief after the collapse of the Wall Street boom and the corporate scandals at Enron, WorldCom, and elsewhere might suggest his worldview is untroubled by facts.
But there is a kernel of truth involved here. The British boom of the 1990s was a weaker variant of the US’s. Though each had different origins, both were sustained by a huge stockmarket bubble that encouraged firms to invest and middle class households to spend.
Now the stockmarket, and along with it investment, has collapsed on both sides of the Atlantic. But the speculative bubble has migrated to the housing market. Consumer spending is holding up both in Britain and the US, in large part because central banks have slashed interest rates.
This has helped to fuel the continual rise in house prices. Better-off households feel richer, or they remortgage their homes on better repayment terms. So they borrow and spend more. This points to a big danger for the economy.
If house prices start falling, as they might, for example, if interest rates began to rise, consumption might also fall, producing a deep recession. Gordon Brown may find himself grappling with a lot more bust than boom in the next few years.
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