The graph above shows the cumulative growth of the public and private sectors of the UK economy since 2001 .Some quick conclusions:
- Far from stimulating the UK economy, increased UK government spending has choked the growth of the UK private sector.
- Private sector growth was flat due to a lack of investment long before the banks blew up.
- The current public sector deficit was entirely predictable and was only exacerbated by problems in the financial sector.
It is also hard to see where the government's future 3% GDP growth will come from. 80% of the growth in GDP since 2001 and 100% of the growth since 2006 has come from an increase in government spending. That is now restricted by the government's borrowing capacity and is quite likely to fall slightly.
So the 3% growth mist come from a 6% increase in non-government activity, having averaged only 2% since 2001. Not only is it highly improbable when recovering from any recession, we also see from the graph that the rate of growth of the private sector slows as the percentage of GDP represented by government spending increases. This is hardly surprising. Loading the economy with extra taxes, or borrowings that will have to be repaid by future taxes, is not a great invitation to investors, which is why the private sector activity declines. The graph implies that private sector activity will not pick up until there is more investment and that won't happen until the level of government activity in the economy declines.
Which is why Gordon Brown's statement that he doesn't like raising taxes is so dishonest. He wouldn't have to if he didn't spend as much money.
2 comments:
It may be worse that it looks. If a proportion of the private sector was actually bloated financial activity indirectly caused by public sector activity or indeed inactivity, then the "real" private sector is reduced. If so there is still a great deal of fantasy finance out there doing no good and potentially a lot of harm.
True, but the size of the banking problems (iffy assets which may pay out substantially in part if not in full) may be comparable in size to the excess of government expenditure, but the difference is that whereas the expectation of loss on he banking assets is X% of face value, the fiscal deficit is 100% certain, and is thus the greater problem.
The £800 billion of planned deficits are a much more pressing issue than the £100 billion or so of possible bank losses.
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