Sunday, March 04, 2007
These are the best years of our lives
Posted by David Smith at 11:00 AM
Category: David Smith's other articles


A lot of important dates are coming up. On March 21 we will have Gordon Brown’s 11th and final budget and, shortly after that, he will celebrate — or bemoan — 10 years as chancellor.

A few days after that it will be the 10th anniversary of Bank of England independence and, looking just a few months on, it will be 15 years since the watershed event that shaped Britain’s recent economic history: the forced exit from the European exchange-rate mechanism (ERM) on September 16, 1992.

Keep that 15 years in mind, for I am about to say something bound to produce a flood of e-mails from the Gordon Brown haters up and down the land (judging by the polls, there are quite a lot of you).

There is a view around that the chancellor has had an easy time from economic journalists, and won’t know what’s hit him when the rottweilers of the lobby start baring their fangs. But, while it may well be that Brown as prime minister gets a tougher time than Brown as chancellor, that may be because the job in 10 Downing Street is tougher for him.

The fact is economic journalists have had a problem. We condemn Brown for his public-spending profligacy, the stealth (and upfront) rise in the tax burden, the mind-numbing complexity of the tax system he has built, the strangling red tape, the off-balance-sheet financing, the selling of the gold reserves as the price was about to soar, the tax raid on pensions and the way important announcements are sneaked out.

But such criticism, of which there has been plenty, has to be tempered by the fact that this has been, in macroeconomic terms — and the green-ink brigade should again bear in mind that I’m talking about 15 years — about as good as it gets. For those of us who remember the turbulent times, the days when interest rates could go up by four percentage points in a month, or in some cases in a day, these have been the best years of our lives. It is hard to think of a better 15-year period in Britain’s modern economic history.

Since the spring of 1992, Britain has grown for 58 consecutive quarters, easily the longest run on record. As the Bank points out in its submission to the Commons Treasury committee’s investigation into 10 years of independence: “No other G7 country has experienced such a sequence.” Every other big economy, in fact, has suffered a recession.

Unemployment has more than halved, with 3m net new jobs created and, contrary to conventional wisdom, no net growth in public-sector employment over the period as a whole.

The average growth rate has been 2.8%, better than Britain’s previous long-run average of 2.5%. The difference may not sound much, but cumulatively it adds up to a lot. The economy is nearly 5% larger than it would have been — £60 billion£70 billion — under the previous growth rate.

Inflation since 1992 has averaged 2.6% on the retail prices index (excluding mortgage-interest payments) and 1.8% on the consumer prices index. As importantly, the volatility of both growth and inflation have come down sharply. It hasn’t just been a case of no more boom-and-bust. There have also been no more wild swings in inflation. In both cases, as the OECD has acknowledged, Britain’s performance in terms of stability has gone from being the worst in the advanced world to something near the best. It has not been perfect — last week I described the record trade deficit — but it has been measurably better.

Some say the past 15 years have been easy and that the last decade has been a piece of cake for Brown and the Bank. The Bank, in response, lists just some of the factors it has had to cope with, including 9/11, the Asian financial crisis, the dotcom boom-and-bust, the tripling of global oil prices and, right at the start of independence, a 25% rise in the value of sterling. Less robust arrangements could have buckled under the pressure.

This may sound like the Bank blowing its own trumpet. Let me add a little percussion. If I were to split the 15-year period, I would say that monetary policy has been somewhat better during the 10 years of independence; inflation has been slightly lower and, crucially, inflation expectations have come down to something near the official target. Fiscal policy, in contrast, was tight from 1992 until 1999-2000, and has been loose since (though the budget will signal slower growth in public spending).

Let me quote Tim Congdon, who has also submitted evidence to the Treasury committee. He was an important influence on the Thatcher government’s monetarist experiment and was honoured by the Tories with a CBE. He has no axe to grind on behalf of the current administration.

But, as he puts it: “Nobody disputes that macroeconomic performance has been substantially better since the end of 1992 than before.” After what he describes as “two decades of boom-and-bust”, the early 1990s brought the onset of the most stable and successful period of modern times, with not only inflation low but with a sharp drop in its volatility.

“The improvement on the inflation front has not been at the expense of the so-called ‘real economy’,” he writes. “Since 1992 output growth has been more stable over a more extended period than at any other time in British history, while employment growth has been strong and continuous.”

Now, not everybody looks at the economic numbers, though they benefit from a stable, growing economy. Instead they worry about debt; I write having just watched a satellite TV advertisement from a spivvy “debt management” firm warning that Britain is drowning in a sea of debt. There is probably more nonsense talked on this issue than anything.

Congdon, however, has some commendably robust words to say on this. Policymakers can help to create the conditions for steady growth, rising employment and low inflation and interest rates. But it is up to us to decide what to do with those conditions. In the absence of a return to the bad old days of credit rationing and controls, the rise in debt and the related rise in house prices reflect our decisions and, ultimately, our confidence in the economy.

As he puts it: “Generally, people have a far better understanding of their own particular financial circumstances than anyone in Westminster, Whitehall or the London-based media.”

Unsecured debt is just 3%-4% of household wealth. All household debt is about 1Å times annual income, but the net wealth of the sector is seven times income. The surprise is not that debt has risen but, given the low-interest-rate environment, it has not risen more. Some people have too much debt. The majority do not. End of story.

PS . Have the Chinese authorities, by giving the impression they were about to clamp down on stock-market speculation — later denied — saved us from an early Bank rate hike? For the “shadow” monetary policy committee (MPC), which has an excellent track record in predicting changes by the actual MPC, the global-share sell-off sparked by China tipped the balance against a rise this month.

Until the market wobble, five members of the shadow committee, which meets under the auspices of the Institute of Economic Affairs, were minded to raise rates. But two switched late, leaving a 6-3 vote for staying at 5.25% this month.

Three of its members want a hike: the aforementioned Congdon, who wants half a point, former dove Roger Bootle and Andrew Lilico, both a quarter. The rest eventually opted for no change, though four of them — Kent Matthews, my namesake David B Smith, Peter Spencer and Ruth Lea — all have a “bias” to raise rates in the near future. One, Peter Warburton, is neutral, while another, Gordon Pepper, sees the stock market’s performance as crucial — the weaker it is, the less inclined he will be to hike.

What about the actual MPC? Last month’s inflation report signalled another hike and some in the City expect it this Thursday. The majority view, however, is that the economic data since the Bank’s decision to hold last month do not support it. As always, we will be watching nervously at noon on Thursday.

From The Sunday Times, March 4 2007


Whilst I have no love for Gordon Brown I do agree with the general sentiment of this post. It is no mean achievement to avoid the "stop -go" policies that used to plague the UK economy.

It is true that his job has been made easier by low global inflation e.t.c. but Gordon Brown has avoided the temptation to meddle and experiment. He has not created economic volatility like so many previous UK governments have.

Posted by: R.Pettinger at March 5, 2007 12:01 PM

It was very refreshing to find this article in the newspaper on Sunday.

Of course, Gordon has made mistakes (don't we all), but often reading about the UK economy, or listening to opposition MPs, you'd think we were mired in some sort of economic disaster. It seems that memories are very short when we are worried about inflation at 4% and taxes getting a bit high, rather than mass unemployment, high interest rates, and lack of investment in public services as we did just 15 years go. People will get a shock if we ever return to such a situation, so let's hope the next Chancellor (and perhaps more importantly the first Tory Chancellor in a few short years) has the same mix of luck and good judgement as Gordon has had.

Posted by: Paul C at March 7, 2007 04:15 PM
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