The paradox of thrift

Britain is stuck in a paradox of thrift. We – members of the public, the companies we work for – have noticed that the economic news seems bad and so we are being as sensible and cautious as possible. The problem is, when we all think like that, the prospects get even gloomier; the government can’t pay off its debt if we’re all trying to pay off ours. Today’s growth figures confirm the situation we are in. Up 0.5% is better than negative, but nowhere near what is needed to keep government debt plans on track. Indeed their forecasts presumed that consumers would be spending more; not so. And if people aren’t wanting to buy, businesses won’t bother to make, regardless of any grandiose ambition to rebalance the economy.

The government will blame everyone but themselves. Pesky Europe causing trouble for us again. Situation much more serious than we thought. But the real problem is one of their own creation. It was this government that frightened the British public into retrenching just when they thought the worst was over. The emergency budget of June 2010 was designed to create an – entirely untrue – perception that Britain was on the verge of a Greek-style debt crisis such that cuts were required on a far faster and deeper scale that was previously presumed. There was no commitment to eradicate the deficit in a Parliament in either the Tory election manifesto or the Coalition document. It was invented on a whim after the election – for political purposes. Of course we need a credible plan to bring the stock of debt down over time. But by creating such a sense of crisis and impending cuts, consumers began to scale back this time last year before the cuts even started in April 2011.

The question now is what to do about it. Labour is starting in the right place by proposing to cut taxes on spending and job creation – never a good idea to tax something you want more of. But we can do more. QE should be buying high grade corporate bond issuance, not government gilts. Our massive infrastructure needs should be designed to be financed by pension funds, not banks. Both of these will force the banks to look at SME lending more seriously. All private landlords should be required to raise their properties to decent home standard if they want to receive housing benefit; that should do wonders for local builders not to mention the life chances of children. Those on medium incomes should have tax credits raised, not cut. Extended hours and holiday childcare needs protecting, and all jobs should be advertised on a part-time as well as full time basis. But most of all, the public needs to believe that there is a plan that will have an immediate impact on their own economic lives, not the lobbying interests of the already rich.

Then and only then will the aura of thrift start to recede.