Recession shows up UK’s complacency

The UK has most likely been experiencing a recession, according to government estimates released last week.

This announcement not only flings egg on the face of economists at investment groups and elsewhere – or, to be more accurate, fries, poaches and scrambles it. It also illustrates how little the UK government has done to stimulate the nation’s economic recovery and helps highlight why the UK remains a shaky investment.

First, the economists. Ever since the start of the UK’s faltering economic recovery, City economists have broadly maintained that the government should focus on getting its budget in order, and private spending should probably just about fill the gap. This so-called Hayek camp – named after the economist that expressed similar views – “kept calm and carried on” in the face of the Keynesian camp, which said the government should “keep calm and carry on” in a different sense, or borrow and spend regardless.

In the short term, the recession announcement has not been kind to the Hayekians. But the Keynesians’ position, ultimately, remains unsustainable. Even the Keynesian to end all Keynesians, Nobel laureate Paul Krugman, has said developed world governments need to consolidate their finances in the long term. There remains a clear imbalance between the indebtedness of countries like the UK and their private sectors, which are running huge financial surpluses.

The problem is that the public sector is putting too little effort into persuading the private sector to invest and remove the burden of growth from the government. Enter the least cited, but perhaps most relevant, economist in the debate – Keynes and Hayek’s arch-capitalist contemporary Schumpeter. Writing in the wake of the Great Depression, Schumpeter predicted capitalism would ultimately come under threat from a dearth of investment opportunities, and said capitalism needed to do everything within reason to encourage them.

Unfortunately for capitalism in the UK, it is suffering from exactly that scenario, which is where the second problem – the UK government – comes in. The UK is a predictable, stable home for international investment – especially in housing, infrastructure and energy – but not enough is being done to market and regulate it as such. Swathes of the UK have an obvious shortage of housing and functioning infrastructure, along with huge potential for energy development – offshore oil and gas and wind farms are good examples. A sensible shake-up of government policy in these areas would, overnight, permit faster investment and create thousands of new jobs. The government, however, is not moving fast enough.