Memories of the Major administration: what growth looks like and why it is not enough
What does a period of sustained economic growth look like? Twenty years ago, the UK was in the early stages of a recovery that went on to become the best eight years for the UK economy since the 1960s. With the annual rate of growth comfortably above the long run average throughout, the economy grew by 35% from 1992 to 2000.
To set this in context, if the economy had grown 35% over the last eight years (instead of just 6%), it would be more than £400 billion a year bigger by now, with public sector revenues at least £150bn a year higher.
The graph shows the golden eight years, from 1993 to 2000, bookended by the year in which growth returned after the recession at the start of the 1990s (1992) and the year in which growth dipped sharply (2001) in the wake of the bursting of the dotcom bubble.
The top line shows the annual growth rate, fluctuating between about 3% and 5%, with far lower (but still positive) rates in the bookend years. The graph also presents the financial balances of the four sectors of the economy, that is, the public, household, corporate and foreign sectors. Such a balance is the difference between the sector’s income and expenditure. Sectors can run surpluses (income exceeds expenditure) or deficits (the opposite) but as a closed system, those surpluses and deficits always add up zero.
These balances are a recurring theme of this blog series. On the one side, it is necessary to acknowledge the still unsustainable scale of the public sector deficit. On the other, stressing the fact that there are four, inter-connected balances helps resist the idea that getting the public sector deficit down is just a matter of government being tough enough to make swingeing cuts.
Rather than the balances themselves (as a % of GDP), this particular graph shows the change in each balance from one year to the next. To keep things simple, it only shows those where the surplus shrank (or the deficit grew) in the year in question.
The point being made here is about the sequence.
So as the graph shows, at the start, the public sector deficit is widening both in the exit from recession (1992) and in the first year of strong growth too. Jonathan Portes has stressed how deficit reduction then was delayed until growth had been restored. The deficit leaps up again as the golden period ends.
From the first year of strong growth, in 1993, the household balance (in surplus at the beginning) starts to fall. A falling household surplus (rising deficit) can be seen in all but one of the eight years. The foreign sector surplus falls during the first half of the growth period but not the second. A steadily falling corporate surplus is a feature of the second half of the growth period but not the first.
There are several lessons here for today. First, we should not worry that growth now is being accompanied by a falling household surplus: that’s to be expected. Second, we should not be surprised that company investment (a big factor in moving the corporate balance) has remained flat as growth picks up: that’s to be expected too – although as a criticism of the official forecasts (by Duncan Weldon) it is well made.
Third, exports need to rise relative to imports (bringing down the foreign surplus) early in the recovery too. Since the household sector balance is already hovering around zero (a level it didn’t fall to in the golden period until the fifth year, 1998), the scope for further falls here is much more limited than 20 years ago. Investment could surprise on the upside but most likely, what happens to the balance of payments over the next few quarters will determine whether this is a sustainable recovery or not.
What the Autumn Statement forecasts for this balance of payments will be one of the important, albeit techy, things to look out for.
But the big thing, of course, is this. The political lesson from twenty years ago is that growth alone is not enough. In the middle of this golden period, John Major’s Conservative government suffered a landslide defeat. Other factors were in play but even so, economic success counted for little. So the most interesting thing on Thursday will be what the Chancellor says and does to try to avoid this fate. If growth continues – which is still a big ‘if’– how does the government ensure that the fruits of growth are distributed in a way to make enough people feel that they are going to benef