It is now almost two years since the credit crunch struck, more than a year since Lehman Brothers collapsed, and almost 12 months since the British economy plunged off a cliff, sinking into the deepest recession since records began. And yet to listen to the political debate, you'd think nothing much had changed.
During conference season, Prime Minister Gordon Brown reeled off a whole new list of spending commitments. In the weeks since, not a single tough decision has been announced on spending. Unfortunately, that is a foretaste of what is in store for the next six months populist, pointless electioneering that just postpones the task of rebuilding the British economy.
And yet the economy is still stuck in recession while the rest of the world recovers. Its budget deficit is spinning out of control and a single word from the ratings agencies could still be the cue for the bail-out from the IMF. The longer the UK delays tackling the real problems with its economy, the worse it will get and the more painful the eventual treatment. In the past year, there has been no sign of the government facing up to the challenging economic circumstances the country now faces. Instead, we get some populist banker-bashing, such as the latest promise to tear up contracts the government doesn't like.
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Where's the debate the country needs? Britain must re-think its dependence on financial services. And it needs to come up with ways of regulating banks that stops them from holding the country to ransom. As for yet more spending, there has so far been no recognition that the government is already spending way more than it can afford. For the last decade, British politics has been largely about bribing the voters with their own money. Now, it is about bribing the voters with printed money. One in every four pounds spent by the government is borrowed, and the main purchaser of government debt is the Bank of England using money magically created in its computers. That really is the economics of the Weimar Republic.
The Conservative party might have a better idea of the tough economic medicine that is going to be needed. But it is still too nervous of the electoral consequences to spell out the pain ahead. It has gone along with the increase in the top rate of tax to 50%, even as it becomes painfully clear that it is fast driving entrepreneurs and companies out of the country. We can expect much more of this in the six months or so until the election is finally called. Gordon Brown's government will carry on spending money as if the stuff was going out of fashion (which, as a quick glance at the gold price will tell you, it already is). There will be lots of talk about making tough choices on the budget. Yet don't expect any of them actually to be made. The opposition parties will be just as bad. Don't expect more than a few headline-grabbing reductions in spending scrapping the Trident missiles system, or reducing the number of MPs.
Yet Britain remains firmly stuck at the bottom of the global growth league, despite a 30% devaluation in the pound, massive government spending, and a central bank that has printed more money than any other in the world. The stimulus might just about prevent the economy collapsing into a full-blown depression although only at the cost of storing huge debts for future generations and weakening the currency. But it is now clear that it is not going to restore the UK to a decent level of growth. The best Britain can hope for under current policies is to repeat the experience of France over the last decade: a state-dominated economy, incapable of growing by much more than 1% a year, and so unable to create enough jobs to maintain its prosperity.
In reality, Britain needs massive structural reform. It needs to bring its tax rates down to competitive levels. The UK doesn't have great infrastructure, or skill levels, nor, apart from finance, is it dominant in many industries. It can't compete when it has the highest personal tax levels in Europe. The only way it can rebuild its economy is by cutting taxes to levels that will draw in a new wave of foreign investors, and encourage a new generation of entrepreneurs. The budget deficit needs to be slashed. Even if you believe the markets will fund a budget deficit of 12% or more of GDP, don't forget that countries with big debts don't grow. Look at Japan and Italy the two most indebted countries in the world, and the slowest growing as well. Public spending simply crowds out the private investment needed to restore growth.
Finally, it needs to stop printing money, and make sterling competitive again. There is no evidence to suggest that devaluation is stimulating exports. Britain does best when sterling is strong, not the other way around. What Britain needs to do is get the savings ratio back up and get investment flowing into business and you can't do that when you are trashing the currency.
It is a tough programme. But, in the medium term, it is the only one that will work. And the longer it is put off, the harsher the medicine will have to be when it is eventually delivered.
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