In recent posts I have drawn attention to the new fiscal-economic approach that the Conservatives seem to have settled on: that they/we can afford to cut the deficit on day one because, economic theory tells us that easier money and a cheaper exchange rate will fill the gap – with higher investment and a contribution from net exports. Here is his speech giving this view. The CEBR have backed this up – without giving us any of that ‘valuable intellectual property’ that might be their workings . . .
So I spent a day or so just looking into how likely this might be. Has the UK ever done it?
Weeellll, not exactly. This graph shows how much net exports and capital investment have added to growth in the past.
You can see that there were some bumper years for Capex, like 1973 or 1988, the Great Overheating: but often net exports pulled the other way. Even the legendary export-led recovery from 1992 did not amount to much – the exchange rate recovered from 1996.
The blue bars dominate. That’s household consumption. If that is weak – perhaps as it might be if a government goes hell-for-leather after a fiscal consolidation – then growth is very hard to find.
The following two graphs suggest that Japan, the exporter-par-excellence, also had a similar experience. Despite exporting to growth for the last 5 years before the Crash, they never got much from business investment:
Again, growth in capital investment and growth in net exports (exports minus imports) tended to go in opposite directions.
The same goes for Germany, the other great Growth through Austerity example that Conservatives are no doubt poring over. Look at these figures:
|Germany||Household consumption||Government consumption||Capital Investment||Exports||Imports||GDP Growth|
Encouraging? Even though exports grew way faster than imports, capex just didn’t grow. Because household and government investment were anaemic, so too was overall GDP growth. Fiscal hawks may envy Germany: the consumers had it rough.
Given similar scepticism about QE (mysteriously missing from the CEBR), I am becoming a bigger fan of Duncan’s idea of a National Investment Corporation. Investment is a good way of leading growth: but how do you make it happen in Depression circumstances? This is one way – similar to Vince Cable’s earlier idea at conference.
What I am certain of is that prioritising the debt at all costs can be a very damaging mistake.