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Dan Lewis: As we exit recession, don't bank on a rapid recovery
BRITAIN is coming out of the worst recession on record and is probably about to enter its weakest ever recovery. No question, 2010 is going to be tough. As the old joke goes, when an innocent holidaymaker asks the local bystander for directions, he answers: "Well, I wouldn't start from here".
The same can be said of our economic circumstances. No incoming Prime Minster in 2010 would want to start from here either. Unemployment is going to go up, the housing market will be hit again, there is a risk of the UK losing its AAA credit rating, driving up interest rates and the start of a seasons long confrontation with the public sector
beckons.
Thus far, this has been a most unconventional recession, just consider the following. For a start, the sheer scale of it, a six per cent fall in output from peak to trough. The surprise meanwhile is that unemployment has risen so slowly, it is still only 7.8 per cent. House prices have now increased for five months in a row. And despite a 25 per cent fall in the pound's value, there has been no sign of an export-led recovery because global demand is still so weak.
This last point in particular underlines the fragility of the recovery. And while unemployment typically keeps rising up to two years after a recession, a lot of those newly unemployed are not going to be able to pay rent or mortgages and that will hit house prices next year because there don't seem to many grounds for new enterprise to engage in job creation.
So what can we do about it all? For my money, I'd say there were four main areas that need to be sorted out urgently in 2010.
First of all the banks. Britain's banks are still not lending to each other, except at astronomical rates, and that in turn means that they are not lending to the rest of us, unless it's at an even higher rate.
The Bank of England's low base rate of 0.5 per cent has not been passed on to the consumer. UK banks are taking the base rate, charging higher margins to pay for huge losses on US lending and arguably, maintaining bonus pools. If you're in any doubt about this, look at the countries which don't have a banking crisis, Sweden and Canada. In those two countries, a mortgage will cost you about 1.25 per cent compared to about 4 per cent in the UK. This will continue for possibly years until UK banks have made up their losses from their customer base. The way out of this is for the Government to enforce audits of their accounts and have them publicly published in the open which will enable banks to lend to each other again at much lower cost because the risks will be known and understood.
Now tax. There's got to be a hefty reduction in corporate tax, now at 28 per cent. Companies are getting up and going to lower rate regimes like Ireland, Bermuda and Luxembourg.
With them, will go top management and crucially, the future investment capital they might have put into this country.
Companies still have money and we will need to attract it to enhance our recovery. The Republic of Ireland shows how much capital from companies and economic growth can be attracted with a competitive corporate tax rate.
Next, lay down a marker and start reducing and long-term, aim, to eliminate all taxes on capital – this may take a generation. The private sector needs huge recapitalisation, particularly the wage and mortgage enslaved middle classes who can't afford non-dom status or clever accountants.
Now the really tough bit, the public sector. There must be a major acceleration of the covert privatisation programme already under way which New Labour call "disposals".
The Government really needs the money. Next, suspend 50 per cent of foreign aid and source all government IT projects with a value beneath 100,000 to the third world via www.elance.com and all print jobs via www.alibaba.com again to developing nations. Where possible, freeze public sector pay for three years, limit recruitment and look closely at competitively outsourcing the vast majority of government services.
And last but not least, politics. With a General Election having to take place by June 2010, and regardless of one's views, the best outcome for the immediate fate of the economy would be a clear working majority. This is starting to look unlikely.
Even if the Tories do get in with a wide margin to spare, the novelty value of being in power is going to wear off for them very quickly when they start to encounter entrenched public sector interests, stymieing their every move.
Let's just hope they don't lose their nerve like Edward Heath did in 1974. I just wish I could be more upbeat.
Dan Lewis is chief executive on the Economic Policy Centre www.economicpolicycentre.com
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