The Coalition and the Economy Professor Brian Morgan UWIC Lloyd George Society 19 February 2011

Which Coalition? I assume I was asked to talk about the London one! But I will have a few words to say about the Bunch in the Bay The presentation will focus on the economic situation facing the Coalition in 2011

The ‘NICE’ Decade

The Great Moderation January 2007 Gerard Baker, the US editor of the Times : “we are living through one of the great transformations of modern history; a period of unprecedented economic stability. Recessions were once as frequent as World Cups Now, they hardly happen. something historic has happened in the past quarter of a century. The business cycle has not been abolished, but in the US and the UK, it has been stretched, to improbably great lengths. Economists have coined a term for this remarkable period of stability …... they have called the current era the Great Moderation.”

The cause of this remarkable stability? “It is the liberation of markets ….... have had a damping effect on the fluctuations of the business cycle.... The economies that took the most aggressive measures to free their markets reaped the biggest rewards……. Similarly in 2004, Ben Bernanke: “the sources of the Great Moderation will continue to be debated …….. I have argued today that improved monetary policy has likely made an important contribution. …. This conclusion makes me optimistic for the future, ………..” Then the credit crunch arrives, but UK already in trouble

Government Expenditure and Tax Revenue as % of GDP The Fiscal Deficit in the UK Budget Surplus

Real UK Government Expenditure as % of GDP Tipping Point

Public Spending The Green Budget (2010), the cuts in spending, "would reverse almost all of the increase in departmental expenditure... as a share of national income since Labour took office". Effectively by 2015 we will have, then, marched public spending up to the top of the hill and marched it down again. (see top left chart below) Legacy for the expenditure splurge?

Five key factors affecting Growth 1.Impact of Cuts a 1% of GDP fiscal contraction reduces GDP by 1% p.a. in years 1,2 and 3 (if expenditure reduced in isolation), GDP growth expected to be between 1% and 3% p.a. on the pessimistic / optimistic scenarios (2011 – 15). 2. Consumer spending - increased by 1% in 2010 after collapse of 3.2% in % increase expected in 2011 but slow rise in wages, house prices falling and credit in short supply, could lead to negative 1% in C. 3.Industrial production Been a huge fall in investment expenditure. Investment has not been a key driver of the recovery in the last 4 recessions

Source Bank of England

Source: ONS Months Since Recession Started Labour market: evidence of labour market flexibility 1980s 1990s Current

Problems of National Debt Interest Payments. The cost of paying interest on the government’s debt is very high. In 2008 Debt interest payments were £31 billion a year (est 2.5% of GDP). In 2009, they were £35 billion (similar to defence budget) - debt interest payments 4th highest spend after social security, health and education. By 2015 they will be 9% of GDP The National Debt will then be 90% of GDP Inevitable ‘Crowding out’ of private sector investment / spending

Public sector net borrowing, % of GDP, 1990s and 2010s Source: Andrew Sentance

Current Scenarios A credible deficit reduction plan is needed to keep the rate of interest on government debt manageable But to do this G has to be reduced from 48% of GDP in 2009 to 39% of GDP in this is a sharper fall in spending than any other country bar Ireland and Iceland. The burden will fall on HE, Environment Dept, and Housing; as well as LAs. NHS and Energy will see an increase

Fiscal assumptions of the Coalition Trend economic growth is permanently lower for next decade Government expenditure and taxes need to be brought back towards 40% of GDP The national debt to income ratio must be reduced steadily from when it is likely to reach 90% of GDP. Fiscal contraction has to begin NOW – to prevent a meltdown in confidence

Economic Growth Without economic growth the national debt will be over 100% of GDP in 2015 Where will growth come from? – Investment in IT industries – broadband etc. – Low carbon and renewable industries – green investment bank needed – Investment in transport infrastructure – infrastructure investment bank needed – Better, faster planning and investment in skills

And Wales? Implications for Wales The Welsh economy is fragile and has the lowest share of private sector employment WAG has to eschew its perennial interest in peripheral vote winning policies Focus instead on implementing a robust economic development strategy that is focused on private sector expansion

Source: UK Competitiveness Index 2010, 74% of UK average

Business Density - VAT registrations per 1000 inhabitants (2009) London44.5 South East40.3 Northern Ireland39.8 South West38.9 East of England38.0 East Midlands33.4 West Midlands32.7 North West30.8 Wales30.7 Yorkshire and the Humber29.2 Scotland28.2 North East22.3 Source: UK Competitiveness Index 2010,

Business Start-up rate per 10,000 inhabitants (2007) London54.6 South East38.5 East of England34.8 South West32.9 East Midlands30.1 North West30.1 West Midlands29.2 Scotland28.4 Yorkshire and the Humber28.1 Northern Ireland25.1 Wales22.9 North East22.6 Source: UK Competitiveness Index 2010,

% of employment in Knowledge Based Occupations (2008) London28.4 South East20.8 East of England17.6 South West16.2 North West16.0 Scotland15.1 West Midlands14.8 East Midlands14.7 Yorkshire and the Humber14.5 Wales12.7 North East12.5 Source: UK Competitiveness Index 2010,

Output per Hour Worked (Index) 2006RANK2007RANK London South East East of England Scotland South West East Midlands North West North East West Midlands Yorkshire and the Humber Wales Northern Ireland Source: UK Competitiveness Index 2010,

Source: Office for National Statistics, Labour Force Survey, Labour Market Statistics % of employment in Public and Financial sectors (2010) Public Sector EmploymentFinancial Sector Employment Wales25.3%2.2% North East25.0%2.5% Scotland24.5%3.8% Yorkshire and the Humber22.5%3.5% North West21.7%3.0% West Midlands20.9%3.2% London20.8%9.3% South West20.4%3.1% East Midlands18.2%2.2% South East16.3%3.0% East of England16.3%2.6%

Weekly pay 2006 – Differential between top 10% public sector jobs and top 10% in the private sector United Kingdom-7.60% South East-19.20% Scotland-5.80% West Midlands-0.10% South West2.00% North West3.30% North East4.40% Wales9.30% Source: Annual Survey of Hours and Earnings

Regional UK Competitiveness Index 2010(UK=100) (Robert Huggins UWIC) Implications Source: UK Competitiveness Index 2010,

What’s needed: A short sharp action plan with imaginative steps in the direction of involving the private sector in delivery of business support Need to encourage WAG to stick to the knitting, to stop inventing new things on which to spend money And make growing the economy the overarching aim of its economic renewal programme.