Sunday, 26 October 2008

The depth of the recession

The 0.5 fall in output reported last week was more than most analysts expected and it is evident that the recession is going to be quite long (I would think at least 18 months) and relatively deep. With the fall in share prices, the problems of the banks are not entirely sorted out as they are finding it difficult to raise capital on the markets. This may be a particular problem for Barclays who understandably eschewed government aid.

As the public come to perceive the banks as 'publicly owned', they may expect government to intervene on all sorts of issues from customer service to repossessions. This is going to cause a real mess as the old model of nationalisation never worked as far as accountability was concerned and we don't have a new one. What the Government should say is that they have no responsibility for day-to-day commercial decisions, but that is politically costly as far as repossessions are concerned.

The fate of small business is becoming something of a political battleground between Labour and the Conservatives. I have a personal interest as one of my children and her husband run a small manufacturing/service business and they are in the process of moving into new premises. (See Signs ) They say that it is quieter than usual, but orders have by no means dried up and they seem to be getting more interest from abroad as the pound falls (although that will push up the cost of the out sourcing they do in China). On the subject of China, controversial columnist Will Hutton has something to say in The Observer this morning. In my view it borders on the insulting, but you can read it yourself here: Hutton

As far as small businesses are concerned, the Conservatives favour tax breaks or deferment, Labour subsidies. Tax breaks really are a form of subsidy but they are perceived differently. Tax concessions give more autonomy to the small business person to decide how to use the money, but it may end up in their pocket. Subsidies, however, may not achieve the required objective and then there is the 'additionality' problem.

This means that you are paying people to do things they would have done anyway. For example, supposing a small firm was trying to train someone up to become a manager and wanted to send them on some courses with their chamber of commerce. As I understand it, even very small firms can now get these paid (or largely paid for) under the Government's 'train to gain' scheme. In other words, taxpayers are paying for something that would have happened anyway.

What is clear is that all this borrowing and spending to boost the economy will end up with a bill which could amount to the equivalent of 2.5p on income tax for ten years. If Dave Cameron wins the next election, as still seems likely, it could be a poisoned chalice.


Justin Greaves said...

Of course the advantage we have this time (over the last recession) is that we go into it wirh a floating exchange rate and (relatively) low interest rates and inflation. However, I am not sure a fiscal stimulus is going to do much good (I refer, for example, to Callaghan's famous 76 speech on keynesian economics). Others are advocating a substantial cut in interest rates but will that work given the unusual circunstances of the credit crunch? If neither a fiscal stimulus nor the relaxation of monetary policy can get us out of this, what will? We do indeed live in worrying times!

Wyn Grant said...

Floating exchange or not one cannot ignore the inflationary implications of a major fall in the pound. It may go down as low as $1.40. I am sure there will be a cut in interest rates, but whether that will do much good is open to question and slashing rates is no solution. The unpalatable political fact is that there is going to be a quite long and deep recession and no actions by politicians can avoid that and some actions may make things worse.