A broadly-based recovery would involve interest rates high enough to encourage capital formation – not low enough to stimulate yet more borrowing.
The true magnitude of the British economic recovery is a subject for legitimate debate, but this debate largely misses the point. The real issue is the nature of the recovery.
Some believe that Britain deserves its place at the top of the developed nations’ “growth league”, and that the government has confounded the doomsayers who argued that fiscal austerity would prove a disaster.
Others retort that this is nothing more than a “fluff bounce”, in which an economy that has not been rebalanced plays the debt-funded consumption card yet again. To such sceptics, the recovery is built on borrowing, and is inconsistent both with an appalling current account deficit and with interest rates that are far too low for capital formation to happen.
For me, the real issue is the contradiction between positive economic stats, on the one hand and, on the other, an on-going deterioration in living standards. It is a strange recovery indeed that coincides with an ever-growing recourse to food banks and the first shipment of Red Cross food parcels to Britain since 1945.
What we need, then, is “a different kind of recovery”. The kind of recovery that I have in mind is broadly-based and sustainable.
What do I mean by this?
Well, a broadly-based recovery would involve the living standards of the majority improving, not deteriorating. It would be driven by exports and investment, not by a debt-fuelled spurt in consumption. Interest rates are the bellwether here – a broadly-based recovery would involve interest rates high enough to encourage capital formation, not low enough to stimulate yet more borrowing.
To be sustainable, a recovery would need to be about securing the economy of the future, not just the spending of today. Such a recovery would involve pain now for gain later. For example, higher interest rates might stem growth in current consumption, but would stimulate capital formation so that we can invest in the future.
As business leaders have been telling government for longer than I can remember, we need infrastructure investment. This investment, though, should be immediate, and high-return. Fixing potholed roads, for instance, would do far more good than the ludicrous HS2 vanity project. Building council houses would make far more sense than borrowing to inflate the values of houses that already exist. Above all, we should be trying to shore up our energy supplies, rather than expecting foreign investors to do it for us.
In short, a recovery based on property price inflation, vanity projects and consumer-funded debt is a cop-out.
What we need instead is a recovery based on investment, which in turn requires capital formation. Thus understood, it is the continuation of ultra-low interest rates that gives the lie to any solidity claimed for the recovery.