Tuesday, 28 December 2010

The rising misery index

The misery index in the economy is likely to rise next year. Unemployment is almost certain to go up, although there is some dispute about how much it will increase by. However, it is unlikely that all the lost public sector jobs can be replaced in the private sector. Indeed, private sector bosses may be unwilling to hire displaced public sector workers whom they suspect of having led a cushy life. Women will be particularly affected as they are disproportionately employed in the public sector.

Inflation shows no signs of easing. There is pressure on commodity prices, particularly food, gas, oil and cotton. At some point the Bank of England will start to increase interest rates, although by how much and when remains a matter of argument. The CBI says 2.5% by year end: I think 1.75% is more likely.

Even so, one of the things that has helped many people through the recession is that mortgage interest repayments have, depending on the deal a person has, have been kept low. If they rose, real disposable income would be reduced even further. As it is, it will be hit by fact that wages are not generally keeping pace with inflation, by the rise in VAT and by the 1p per £ increase in national insurance contributions from April which is in effect a 1 per cent rise in income tax.

Not surprisingly, retailers are worried about consumer demand. Of course, an objective of current policy is to shift the economy from one driven by private consumption to one in which exports play a greater role.

Meanwhile, the Government is suffering a series of defeats at the hands of fiscal nimbyism. The unfortunate Michael Gove has had to retreat on school sports and free books for young children. In the latter case the sum involved is small, but one way in which retrenchment tends to happen is by cutting smaller programmes completely. Now the Government is under pressure on the forensic science service, the privatisation of which strikes me as not a good idea.

Campaigns may achieve victories on particular issues. An alliance of nimbys may well defeat the proposed HST from London to Birmingham, the start of a larger network. My local MP Chris White has come out against it, reflecting the views of his constituents. The opponents of the scheme say that the business and environmental case is flawed, but if that is so, how have countries such as China, France, Japan, Korea and Spain been able to make high speed trains viable whereas we just have a stretch of line in Kent?

What is clear is that there is choppy political water ahead in 2011 and it may not be possible to deflect the opprobium on to the Liberal Democrats.


Steve Kettell said...

Cheery reading! Not sure about thr ouse of the phrase 'nimbyism' though. Does this not imply some kind of 'unreasonable' special pleading on the part of those affected? Why highlight a children's book scheme as an example of nibyism rather than, say, 'corporate nimbyism' for firms dodging their taxes, or 'financial sector nimbyism' for the banks that have effectively landed the economy in the mess it's in, but which continue to avoid shouldering their 'fair share' of the burden, or even responsibility, for the mess they've made? Other than that, I have to agree: 2011 is likely to be an unforgettable year to forget.

Wyn Grant said...

The problem the CG faces is opposition to a whole series of specific measures, although it is easier to give ground on a £13m book scheme than something like the EMA which is arguably more important. 'Nimbyism' seems appropriate when people are complaining about something that affects them or their pet projects. A cartoon shows an interviewer talking to a voter: 'Which cuts would you like to see which affect other people?'

Anonymous said...

I do wonder if the government is acting too fast and cutting too severly at time when the private sector is not in a position to provide employment and sufficient demand for the economy. The coalition government may want to get the pain out of the way fast, but if the UK heads to a Japan style long-term slump, wouldnt the economic pain be pointless? I do feel that the coalition is ideologically driven in its rapid push for cuts.

Wyn Grant said...

The risk of not cutting the defici is that you lose the triple A rating, the cost of servicing the debt becomes greater and eventually the IMF comes in as happened in 1976. The growth forecasts don't suggest a long-term slump, but the employment effects are more worrying. At some point the Government will row back a bit, indeed that has already happened a little. If the economy really is dependent on public spending, that is quite worrying. I think the Government is in part ideologically driven, but aren't governments entitled do that rather than just being technical managers of the economy?