Imminent Recession? Now there's a Surprise!

Various agencies are now 'forecasting' a return to recession for our economy either in this quarter or the first quarter of 2012. How very profound. Government ministers seem shocked and set to pin the blame on Europe this time. The 'blame their predecessors' tactic is past its sell-by date and, if you are into blame, there's an odd reluctance to pin most of the blame where it truly belonged in the first place - with the banks.

But would a further recession be so surprising? Not a bit of it! As I and many others have been saying all along, if you are already in or near a recession and you introduce deep cuts just what do you expect? The economy will be bouncing along the bottom - or worse - for years.

Well, the government expected the private sector to leap in and not only replace all the lost jobs and more but to produce overall growth in the climate of cutting. The least uncomplimentary way I can think of to describe this view is 'wishful thinking'. More likely paid advisors have been telling ministers what they wanted to hear - Tea Party level Reaganomics MkII.

There are three important factors in determining industrial expansion - demand, demand and demand. So what happens to consumer demand when you generate massive job losses and put those employees who survive the chop this time in fear of their jobs? Could there just possibly be a bit of a dip in domestic consumer demand? Could the reduced requirements for goods and services by national and local government, the health service etc possibly take the edge off business demand? And what about international demand?

Hey! How about this for a strategy: cut the domestic component and have an 'export-lead' recovery. So dazzlingly brilliant a wheeze that every other struggling economy to whom we export does the same! Result? Refer to Mr Micawber on an income of £19 - 19 - 6.

So what do we need to do? First stop the latest blame game - these are useless distractions. Second, increase the buying power of those on lower incomes. This could be done at no net cost to the exchequer by redistribution (more below) and would, as well as righting injustices, be stimulating through the Keynesian balanced budget multiplier (see previous postings). Third, scale back the cuts on the local government, health service and defence budgets.

Fourth, start a major programme of capital investment with incentives for firms and, most important of all, government led projects (such as a Severn barrage discussed elsewhere on this blog). HSII if you must - but don't believe those jobs figures and alternative transport projects including conventional upgrades would give a better result. Make sure that the contracts go to British companies (you can do this if you really want to), that employment is maximised and the opportunity to train young people taken up.

How to pay for this? The first thing to note is that the total net expenditure will be less than the apparent cost in economic stasis. The government seems to be realising that as the economy shrinks they miss their financial targets. The other side of this coin is that as the economy grows tax revenues increase and benefit payments reduce. But this process shouldn't be relied on to cover it all. There's no economic magic and we have our friends in 'the financial markets' to take into account. Oh what nice people they are (another story).

So, where's the money coming from? If you read most of the newspapers we're blessed with, experts are scratching their heads having considered all options. But wait! What's that elephant there in the corner? Could we just have overlooked the possibility of taxing the rich a bit more? OMG, think of all those directors who might up-stumps! But let's say we've heard 'wolf!' before and see if we could struggle along with a few less of the over-indulged variety anyway. I'm old enough to recall that when Mrs T's chancellor reduced the top rate of tax on the rich to 60% they thought they'd gone to heaven rather than just Switzerland. I'm not suggesting 60% again - I'm too kindly for that. So how about a total top deduction of around 55% inclusive of a flat rate NI over all income levels?

So there could be a Plan B after all! But will we see something like this? No more chance of this I fear than an Xmas time-warp, again a la Dickens, taking the government back to the 1930s for a refresher course on all that they have so clearly and so conveniently forgotten.