Say “Welcome To Recession,” Great Britain

by Mike Goodman

We’re Not In Recession!

Not officially. But we soon will be. The government are congratulating themselves on reaching a so-called budget surplus for the last quarter (October to December) of 2017, which was the third quarter of the fiscal year just ended. They have done this, regardless of the state of the economy, as a deliberate policy target since that was first set by George Osborne.

“What is wrong with a budget surplus?” is a reasonable question, especially as budget deficits are decried as a deadly sin by those espousing the neoliberal political dogma, in turn loosely backed by the very flawed neoclassical school of economic thought. We have heard of little else in the economics framework beyond the “necessity” of austerity for several years now.

So let’s take a look at the facts. No theories, no mantras, just plain facts backed by long-published statistics and some well recorded political history. We’ll look at some fairly straightforward resulting conclusions after that.

What is really happening?

During the 1960s, British economist Wynne Godley noted an accounting identity within the outputs making up GDP, or aggregate demand in an economy. By rearranging its components, where:
S = private sector savings;
I = private sector investment;
G = government spending;
T = taxation receipts;
X = exports
M = imports
We can take (S – I) as the private sector, (G – T) as the government sector and (X – M) as the external, or foreign, sector. Hence:
S – I = G – T + X – M which we display in graph form for the UK, 1987 to 2017:UK Sectoral Balances as % of GDP, 1987 to 2017
From this simple equation we can see that the savings, meaning money to most of us, available to the private sector are affected by the level of government spending with regard to taxation and the external trade surplus or deficit. A deficit in either reduces the amount available to the private sector. There are many fuller explanations of this tautologous statement on the web, including this one which illustrates how the three sectors act together in the USA in a very similar manner to our UK graph above, to balance, which they do consistently, period upon period. It also goes much further into the workings of our simplified equation, above.[1]

So, the government sector is now in surplus, which means its income from taxes, which include fines and licence fees, is greater than its expenditure on public services and infrastructure. As we see from our equation, which is an accounting fact, nothing theoretical about it, that surplus is taking financial resources from the private sector. That means less jobs, less money to spend and a general downward spiral.

This is exacerbated by the fact that the politicians of the political party in power are all in it to tell the poor that they will pay together. That is to say, much of the budget “savings” have been made by cutting welfare benefits, resources to national public services, reductions in local government services.

When a government surplus is created by a strong economy and robust earnings, so the tax take increases substantially due to economic activity, all is well and good. It will happen naturally without government intervention, no harm should come of it and the private sector should still have sufficient funds for savings and investments.

Other Indicators

This is not a period of strong economic activity however. Unemployment figures have not so much been massaged as knocked completely out of shape such that both zero hours contracts and part time jobs are counted in the employment figures. Many people who would like to work but cannot find jobs have been barred from registering as unemployed. Unofficial attempts to measure the real level of unemployment start at something over seven million people either unemployed or underemployed.

A report from last September in Dutch online journal Business Insider underlines the statement regarding employment above. For all practical purposes we may as well discard the official figures altogether. So there is an awful lot of productive capacity going to waste.

More disturbing is the fact that every recorded economic downturn has been preceded by the private sector entering deficit territory. The most recent ONS data are shown in the bar chart below with the line showing loans heading upwards, towards recessionary area once more as assets turned negative in the October-December 2017 period.

Bar chart from the ONS site showing private sector spending
ONS private sector borrowing

For further evidence of where we are at currently and how long it will take before recession takes hold, we look to the monthly Purchasing Managers Indices (PMIs). Figures above 50 show optimism and below 50 show pessimism.

The UK index for Construction shows the construction sector has been in recession for a short while already. The full breakdown shows house building just about in positive PMI Construction Sector Brakdown to Janaury 2018territory but commercial construction and civil engineering activity below 50 and heading south.  The overall trend for construction has been downwards since its peak in January 2014.

That for Services showed a sharp fall in February, still above 50, with a small recovery in March but we cannot be confident about the next issue which will report for April.

The only index which has retained any optimism, and that is on its downward fluctuation, is manufacturing, not a strong enough sector to get the economy moving again on its own. The May releases of the PMI data will have a story to tell.

The non-neoclassical economic view

Professor Steve Keen, of Kingston University (London, England), towards the end of 2017 had forecast a recession for the UK at some point next year, 2019.

There are strong signals that government policy may have hastened that downturn. Furthermore, employment levels and low construction activity could well be pointing to the fact that we have been bumping along the bottom of the shallow end of a recession for a while now. The continued and deepening austerity programme could very easily be taking us towards the deep end of a tougher and more prolonged economic situation.

It has been said and reiterated many times by serious economists and impartial observers that an austerity programme at any time of less than full employment and high economic activity is going to do a lot more harm than good to any economy, however strong. Still recovering from the Great Financial Crash of 2008 – 2010, the British economy is in no shape to withstand such an onslaught. This Conservative government has followed a political doctrine of such breathtaking ineptitude it will take an awful lot to recover from it.

Further bad news for the government came last week in the form of new inflation figures showing a fall, only a very small one but a fall is not an indicator of rising economic activity. Quite the opposite.

[1] Wikipedia also has a page with some good links for further reading.

Author: Mike Goodman

Mike's main intersts are in economic policy, politics and current affairs. He has a degree in economics. He is retired now but still makes himself available occasionally for interesting speaking or training engagements. Leisure interests include rugby (the union code), cricket, music (especially modern to contemporary jazz), food, wine, good company or a good book.