Problematic boosters

Austerity hasn't held back UK growth

Even after two quarters of strong growth, UK GDP is at the same level as in the first quarter of 2007, 2.5 per cent below the 2008 peak. Critics blame the long retreat on the government's post-crisis fiscal austerity. But the pre-crisis largesse deserves most of the blame. From the 2000-01 fiscal year to the 2007-08 fiscal year, the UK's GDP rose by 23 per cent, a three per cent annual pace. But UK government spending rose by 44.3 per cent in real terms, almost twice as fast as GDP. That was unsustainable.

Meanwhile, house prices were spiralling upward and borrowers turned part of their loans into additional spending power. The Bank of England puts that figure at a total of £230 billion from 2000 to 2007. That sum, added to the increase in government spending in the same period, was similar to the overall rise in GDP. It all begs the question: just how much of the UK's magnificent ascent to 2008 was based on anything sustainable? "Very little" is the disappointing answer. The UK was bound to retreat far and fast once the housing bubble popped, growth slowed and the government's deficit exploded.

Much of the retreat in GDP since can be traced to the return to more sustainable conditions. Home owners have paid down £206.5 billion in mortgage debt since 2008, according to the Bank of England. That is a lot of money out of consumer spending. And the government has essentially frozen its spending, making for a real-terms cut of about four per cent since it took office, though its deficit, at seven per cent of GDP, remains large.

Given these retrenchments, the wonder is that there is any recovery at all. But there is one, encouraged by appropriate, low interest rates. And, for the moment it is broadening and looking far stronger than was expected earlier this year. UK growth will be by far the fastest of any major European economy this year. Austerity has not killed the economy.However, the government does not seem to have learned the lesson about the dangers of unsustainable policies. George Osborne, the austere chancellor, has pressed for ever more monetary stimulus. The Bank of England's enormous £375 billion of quantitative easing was not enough. Osborne was eager for new credit stimulus schemes, Funding for Lending and Help to Buy, which ignore the chronic shortage of housing.

True, these schemes may be speeding growth. Yet, UK inflation is 2.7 per cent and the recovery is still young. There is a danger that stimulus will stoke inflation, and not only in house prices. That may bring higher interest rates, which would suddenly leave the UK economy gasping. The UK's record could hardly show more clearly the danger of pushing growth up with house prices and excess stimulus. Politicians, all too eager to plant a flag on a new GDP peak well before the next election, prefer not to heed the lesson.