Eamonn Butler: A fake boom will lead to a worse crash

BRITAIN’S economy is booming again. Wages are outstripping prices again. Consumer confidence is up. The Stock Market is riding high. Businesses are starting to invest. Fewer people are out of work. Nearly half a million private-sector jobs were created last year. House prices are rising at their fastest in a decade. So it is not surprising that the Bank of England predicts UK economic growth will soar to 3.8 per cent this year, and 3.2 per cent next year, faster than any other rich country.

So, how fake is this growth? The sustainable long-term growth rate for a mature G7 economy like ours is nearer to just two per cent. Will any politician tell you about this yardstick? Or about any other key factor determining the real direction of economic success? Surprisingly, they don’t.

Today, actually, looks very much like the boom bubble of the early 2000s, which burst so spectacularly in 2008, with failing banks and huge debts that we are still struggling to pay off. In less than five years, this coalition Government has already outstripped borrowing of 13 years of Labour at well over £400bn. The economic recovery ahead of the 2015 election is on borrowed time and funded at the taxpayer’s expense.

Sign up to our daily newsletter

The i newsletter cut through the noise

If not politicians, will at least financial officials tell you and their political masters the truth? William McChesney Martin, chairman of the US Federal Reserve in the 1960s and 1970s, once said that a key role of a central bank is “to take away the punch bowl just as the party gets going”.

Well, our economic party is certainly back in the swing again after the authorities’ hair-of-the-dog remedy of rock-bottom interest rates and £375bn worth of virtual money-creation through quantitative easing. The Bank of England should dash away the punch bowl at lightening speed.

The bad news is that means higher interest rates. Households, businesses and the Government itself can borrow so cheaply. Consumers borrow to carry on indulging their boom-time spending habits, while poorly performing businesses are kept alive by cheap credit.

We can hardly call it “austerity” when the rate of company failures is lower than it has been in decades. Research by the Adam Smith Institute suggests that our low interest rates are keeping alive over 30,000 “zombie” firms which in normal times would have failed.

This fake-boom policy will come back to bite us harder the longer we wait. Inflation lags behind booms and busts, today’s relatively low rates reflecting the picture of two years ago. But eventually it will soar on the back of all the cheap credit and virtual money that has been pumped into the economy. The time to choke it off is now. That means before the elections, not after.

The Government’s hope is that the imagined boom will sustain us long enough to raise business confidence again and get some genuine, productive investment going. But any number of factors could collapse this house of cards. The banks are still in Co-op territory.

With few savers and plenty of borrowers at today’s low rates, they will soon run out of money. Unlike 2008, next time the Government will have no spare cash to bail them out. The EU, our biggest trading partner, is in decline, and the euro itself could collapse under the indebtedness of several member countries following a second crisis.

The good news is that the way out is not as hard as it seems. The bad news is that the Government is doing everything it can to spin our hopes. Despite talking “austerity”, our Government still borrows £1 for every £6 it spends – and it spends half of what we earn.

Cheaper mortgages – plus some ill-conceived policies to help people buy houses and to guarantee their loans – have created another housing bubble.

Property prices are up 9.1 per cent over the last year, and up a crazy 17.1 per cent in London, boosted by Russians and Europeans looking for somewhere safe to put their money. It is all smoke and mirrors – 2007-08 all over again.

We won’t get out of this without pain, and the longer that our financial and political authorities put off raising rates and cutting their spending, the worse the eventual hangover will be. With European and local elections coming up next week, that may be an unwelcome prescription. But if the medicine does not come soon, the next crash could be far, far worse than the last.

Dr Eamonn Butler is director of the Adam Smith Institute. His new book is The Economics Of Success: 12 Things Politicians Don’t Want You to Know is published by Gibson Square, price £12.99, e-book £8.99.