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  • Richard Horswill

Growth, growth, growth

This article was written by Richard Horswill. All views and opinions expressed are strictly his own.


The general election has produced many promises to fix UK PLC, one of which is “economic growth” so that the newly elected government will be able to pay for all of the stuff it intends to do. Fix the NHS and social care, build one and a half million new homes, make the UK a clean energy super power and so on. This of course will cost an inordinate amount of money which is why without the growth dynamic, the income required to undertake these schemes will not be readily available. Promises also on general taxation not to be raised only exacerbate the need for the proposed economic growth, and thus place a heavy burden on the new government to drive forward the policies that they hope will eventually lead to the “growth nirvana” that has been promised. Traditionally, the way to assist private sector investment with a growth agenda in a low growth environment would be for government to borrow to stimulate the private sector, but with the current interest rate situation that option is not a viable one, particularly with our very high debt service costs. Therefore, how can the circle be squared for the new government to provide for all of its plans? This article will attempt to provide a back drop as to why the politicians may well come up short yet again.


The most valuable question to ask is how is economic growth derived at its most basic level? The obvious answer would seem to point to investment, but one then has to ask where the investment comes from? Small, medium and large businesses all play their part in local, regional and global terms. However, if for whatever reason these businesses are unable to perform consistently to drive their own growth dynamic internally, along with new entrants into markets who may be unable to compete due to a lack of private investment, then the local, regional and global banking system becomes the primary investor, subject to their lending practices. However, what if the banks tighten their lending criteria? As we have been seeing over the last couple of years, banks have not been too forthcoming with lending, principally due to inverted yield curves which are indicating a negative outlook for future growth and inflation expectations, as their net interest margins have been squeezed by the unnecessary interventions by central banks at the front end of the curve; and their ongoing dogmatic perseverance to control the inflation narrative! Supply shocks and high energy prices they cannot control, with actually, the cure for high prices being the high prices that eventually die a natural death on the back of constrained disposable incomes. Hence the cost of living crisis, that the poor and even middle class man in the street has been saddled with. Should the central bankers really have used their blunt instrument so unwisely as to undermine the economy so thoroughly! Therefore, the UK along with the global growth picture is absolutely constrained. This has actually been the case since the monetary and financial crisis of 2008 when the global banking system changed its business model to a significantly more risk averse one that has impacted negatively on the debt based growth model. So what does this all mean for the incoming UK Labour government? And how could some fiscal headroom be made available for government spending to pull demand forward using the Keynesian playbook?


Based upon my expectations relating to a possible global deflationary recession and thus the absolute need for significantly lower interest rates, particularly as this prolonged globally synchronised business cycle, primarily driven by pandemic stimulus that has indulged and endured, albeit with incredibly low global growth, is seemingly ready to end. Serious signs of a globally synchronised recession abound, but also with the potential of another financial crisis to boot as debt servicing costs driven by central bank economic mismanagement make businesses uneconomic and vulnerable and the man in the street much poorer. Monetary policy lags will also mean that higher fixed rates that have already been taken will prolong any recovery even in the event of the probable sharp interest rate cuts that are inevitable from central banks trying to get back ahead of the curve but with a high probability of limited success. The only hope in this disastrous situation will be government borrowing at the much lower rates driven by safe haven investing, as investors seek the safety of secure and liquid assets in the form of government debt. This will drive bond prices higher and crush yields. This may be the opportunity for the Labour government at least to borrow to invest rather that follow the 2010 coalition austerity plan that has in some part led to the UK infrastructure meltdown we are now seeing. One irony is, had the Truss mini budget been supported by the Bank of England, the markets may well have been somewhat more amenable to the strategy or at least giving it some time. In this scenario, the UK may well have managed to get ahead of the pack by stealing some growth from the global economy as businesses could have taken advantage of lower corporation tax rates, potentially bringing in well paid jobs to the UK to furnish government with higher tax revenues. All of this however is now history, but could the newly proposed growth driven funding scheme be delivered under the prevailing global economic malaise by following a Conservative plan? Sadly, the new chancellor is seemingly hell bent on sticking to her fiscal rules which will mean only one thing, a continuation of austerity and the deterioration of the economy.


It seems to me something of an improbable growth “dream” that has been proposed, and that any promises cannot be, and thus will not be kept. The only possible outcome based upon the ongoing depressionary environment will be one that keeps the UK and the global economy bumping along the bottom indefinitely. Without investment there is no growth and with high interest rates there will be no growth. Therefore, the ongoing depression that commenced in 2008 stagnating the global economy and rendering it impotent, is one that will seemingly continue unabated, which for the new UK government will leave them with little to no possibility of achieving any of their goals within the five year term. A rather depressing outlook sadly, but one they have very little control of whilst the global banking system is risk averse and its regulators are damaging the monetary transfer mechanism.


The Labour Party have been given a chance to prove themselves as a viable alternative in a political sense, however the actual position they find themselves in is holding a poison chalice they have no control over, and which is likely to kill their hopes and dreams off slowly and painfully as they realise there is no money without higher taxation or significant borrowing; both of which they have promised not to do! 


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