Published:

31 comments

Alex Morton was a member of David Cameron’s Downing Street Policy Unit.

I do not want to criticise last week’s Budget. On its own narrow terms, it was a success. For a start, it was good to note the return of home ownership to its rightful place at the centre of the Conservative narrative. No period of electoral Tory dominance has ever been won without home ownership offered as part of its core. The policies on housing might not be sufficient, but without increasing home ownership and the stability, security and opportunity it brings, the Conservatives are doomed.

Yet it is impossible not to have wider concerns based around the OBR’s projected growth downgrades. Since the end of the Great Recession in 2009, the UK and wider West has seen sluggish productivity and GDP growth. We are now entering the lowest period of economic growth since records began. It is quite phenomenal – and, as the OBR point out, it is shared with other advanced economies.

Wider factors indicate a stagnation as well as productivity measures

Some argue that productivity is being under-measured. Smartphones or Spotify services are usually given as an example. I would argue that the reverse is true. The fact you can watch videos and listen to a personalised radio on the move in return for advertising via a cheap device is useful, but compare it with the colossal life changes created by the spread of electricity and running water, or the spread of cars or household appliances in the latter part of the 20th century. It would be easy to go back and argue that 2.4 per cent growth underestimated the fundamental changes these created – productivity has always been inexact. Further, by 2007/8 the internet (and the change it brought) was already in around two-thirds of households.

Moreover, when it comes to the key issues of security and stability – most of all through owning a home, but also through a good pension, productivity data ignores a deterioration for many people. Home ownership is in freefall, and defined benefit pensions coverage fell from 51 per cent of the population in 1983 to just 29 per cent of the population in 2015, with remaining schemes largely closed to new members. Productivity also ignores our major balance of payments issue, with a current account deficit every year since 2013 of around five per cent – each year worse than the previous record in 1989.

We and the Western World are following Japan into permanent semi-stagnation

Well before the advent of smartphones, one country had already fallen into a long term semi-slump: Japan. During the 1980s, it was the star advanced economy with growth between 1980-7 averaging four per cent or so, and a mini-boom between 1988 and 1991 seeing growth at five per cent a year. But Japan then saw a short and not particularly deep slowdown, with GDP growth of just 0.8 per cent by 1992 and 0.2 per cent in 1993. Since that slowdown, Japan has never recovered. From 1994-2001, the Japanese economy grew at under one per cent. Since 2002 Japan has managed to grow at just 0.8 per cent a year. A ‘lost decade’ became a second, and is now becoming a third. Japan has slid from being the star in terms of economic growth to become the most sluggish advanced economy. And now most of the Western world, including the UK, are sliding to follow it.

Almost all our current policy prescriptions mirror Japan’s failed solutions

Almost all of the solutions that are currently being posited follow those of Japan. The Japanese Government followed the classical Keynesian approach of large deficits. Japan switched from a surplus in the boom of 1991 to a deficit of -3.8 per cent by 1994 to try to get growth moving again. When this failed to work, the Government simply doubled down – in 1998 it ran a deficit of nearly ten per cent, and in only one year since 1993 has it run a deficit of less than three per cent. Japan’s debt currently stands at an eye-watering 240 per cent – a situation unprecedented for an advanced economy outside of wartime. Following the George Osborne book of loose monetary policy, the Bank of Japan cut the interest rate to 1.75 per cent by the end of 1993 and then to zero. When this failed it introduced the policy eventually termed ‘quantitative easing’ – injecting money into the banking sector by buying bonds directly.

Japan also both saw a high rate of investment and a high rate of R & D spend throughout these lost decades, two prescriptions often made in the case of the UK, with both of these throughout Japan’s stagnation being much higher than the UK or high income country average – in the case of R & D spending nearly double the UK’s rate as a share of GDP.

If we are turning Japanese, our entire macroeconomic thinking needs an overhaul

This is not meant to criticise those, often on the left of the party, who are calling for greater infrastructure or R & D spending. Both of these are linked to higher growth rates in various economic studies. And at least figures such as Nick Boles or George Freeman are trying to rise to the challenge set by the OBR. But what if the low rates and deficit spending, far from boosting the economy, damage it? And what if R & D and high rates of investment are powerless in the face of these countervailing factors?

If this is the case, our entire macroeconomic thinking needs an overhaul. But is this necessarily a shock? Our entire macroeconomic thinking failed to predict the global financial crisis. It has failed to lift Japan out of its slump. It is entirely possible that the slide into Japan can only be arrested by a new approach to how to move an advanced economy from a low growth path.

Such a set of theories will necessarily prove as radical now as the rise of monetarism and supply side economics were during the 1970s – though the capacity for such intellectual renewal in the UK, like many advanced economies, has been crippled by the near purging of right-wing thinking from our universities (though some sensible centrist and a few isolated conservative academics remain), as discussed previously in this column. But if we are sliding to follow Japan, this task could not be more urgent or more timely. If we are indeed turning Japanese, the only question is whether May or her successor will be capable of grappling with this challenge or if we will have to ensure a dysfunctional Corbyn Government until a future Tory radical emerges to lead us out of our own lost decades.

31 comments for: Alex Morton: A terrifying possibility for Britain. We are turning Japanese – and entering an era of permanent stagnation.

Leave a Reply

You must be logged in to post a comment.