US economy - the combination of structural slowdown and cyclical recession

By John Ross

Summary

This article focuses on evidence confirming long-term slowdown, as well as cyclical recession, of the US economy as indicated in the latest release of the 2^nd quarter 2010 US GDP figures.

Introduction

As widely reported, the second estimate of 2^nd quarter 2010 US GDP revised annualised US growth down from 2.4% to 1.6% - i.e. US GDP grew by 0.4% during the 2^nd quarter. The main changes compared to the first GDP estimate, in constant and annualised 2005 price terms, were a downward revision of net exports by -$19bn, due primarily to an upward re-estimation of imports by $14bn, and a revision of inventories downwards by -$13bn. Fixed investment remained essentially unchanged compared to the earlier first GDP estimate, with a revision downwards of -$1bn, and personal consumption was recalculated as $8bn higher than in the first GDP estimate (Bureau of Economic Analysis, 2010b) (Bureau of Economic Analysis, 2010a). An earlier article made a detailed examination of 2^nd quarter US GDP data and therefore only the implications for long-term trends are dealt with here. (Ross, 2010)

Slow recovery

The downward revision of 2^nd quarter GDP naturally highlights how much slower present US recovery is than in previous post-World War II business cycles. Ten quarters into the downturn US GDP still remains 1.3% below its peak in the 4^th quarter of 2007 – see Figure 1. In the previous worst post-World War II business cycle, that following 1973, recovery to the previous peak level of GDP was complete after eight quarters. Unless there is a significant acceleration of growth, US GDP will not regain its peak level until 2011 – meaning at least three years of net zero percent growth.

Figure 1

This slow recovery is, however, in line with a gradual but clear deceleration of long-term growth in the US economy – see Figure 2. The moving 20 year average of US GDP growth has now fallen gradually to 2.5% - significantly below its 3.5% historical average. Reasons the US is unlikely to reverse this trend in the foreseeable future are analysed below.

Figure 2

Fixed Investment fall

The new GDP figures also cast clear light on the issues of whether the recession in the US is primarily created by trends in consumption or investment. A number of analyses suggested that the core of the US economic crisis would be deleveraging by US consumers– see for example (Roach, 2009). If so the decline in US GDP would be centred in US consumption. The present author has consistently argued that this analysis is in error and that the core of the recession in the US is the decline in fixed investment. (Ross, 2010a) This is again strongly confirmed by the new revision of US GDP data.

Due to the significant downward revision of the US GDP figures, and the small upward revision of the consumer expenditure figures, consumption as a percentage of US GDP clearly remains well above its pre-financial crisis level – see Figure 3. Between the peak of US GDP, in the 4^th quarter of 2007, and the 2^nd quarter of 2010, US personal consumption has risen from 69.9% of GDP to 70.5% and total US consumption has risen from 85.8% of GDP to 87.6%.

Figure 3

The 1.8% of GDP increase in consumption as a percentage of US GDP is accounted for by a 0.8% of GDP increase in the share of military expenditure, a 0.6% of GDP increase in the share of personal consumption, and a 0.4% of GDP increase in the share of Federal non-military consumption.

In contrast the share of fixed investment in US GDP has fallen sharply by 3.6% of GDP. The share of non-residential fixed investment has fallen by 2.1% of GDP and the share of residential fixed investment by 1.5% of GDP.

The changes in components of US GDP, in terms of fixed price annualised 2005 dollars, are shown in Figure 4. US GDP remains $172bn below its previous peak level. However net exports, inventories, and government consumption are already above their 4^th quarter 2007 level – by $116bn, $51bn and $112bn respectively. Personal consumption is below its 4^th quarter 2007 level but only by $72bn. The US recession is entirely dominated by the $410bn decline in fixed investment.

Figure 4

The US economy, therefore, has not responded to the financial crisis primarily by reducing consumption, through personal debt deleveraging or other means, but by sharply reducing fixed investment.

Implications for long term US growth rates

A severe decline in US fixed investment, however, does not have only short term effects. As confirmed in the latest data of Jorgenson and Vu, capital investment continues to account for more than fifty percent of US GDP growth – the percentage for the latest period they analyse, in 2004-2008, is 61%. (Jorgenson & Vu, 2010) Under such conditions a severe decline in US fixed investment, of the type seen during the current recession, in practice excludes a rapid resumption of US GDP growth.

The slowdown that has been witnessed in long term US economic growth is therefore likely to continue. The present recession confirms a pattern of not simply cyclical downturn but structural slowing.

In that context the marked acceleration of US GDP growth which took place in 1995-2000 would appear to be a temporary upward fluctuation, financed by large scale import of capital, within an overall context of a long term structural slowdown of the US economy. It would not appear to mark the beginning of a more rapid US growth period.

The above trends therefore indicate that not only short but medium and long term projections for US economic growth should be assumed to be lower than historical averages. The US economy has been gradually slowing in not only a cyclical but a structural fashion.

* * *

This article originally appeared on the blog Key Trends in Globalisation.

Bibliography

Bureau of Economic Analysis. (2010b, August 27). National Income and Product Accounts Gross Domestic Product, 2nd quarter 2010 (second estimate). Retrieved August 27, 2010, from Bureau of Economic Analysis: http://www.bea.gov/newsreleases/national/gdp/2010/gdp2q10_2nd.htm

Bureau of Economic Analysis. (2010a, July 30). National Income and Product Accounts: Gross Domestic Product: Second Quarter 2010 (Advance Estimate). Retrieved July 30, 2010, from Bureau of Economic Analysis National Economic Accounts: http://www.bea.gov/newsreleases/national/gdp/2010/gdp2q10_adv.htm

Roach, S. (2009). The Next Asia. Hoboken, New Jersey: John Wiley and Sons.

Ross, J. (2010a, February 11). The myth of the decline of the US consumer. Retrieved August 28, 2010, from Key Trends in Globalisation: http://ablog.typepad.com/keytrendsinglobalisation/2010/02/the-myth-of-the-decline-of-the-us-consumer.html

Ross, J. (2010, July 31). US 2nd quarter GDP figures - investment remains the key issue for US recovery. Retrieved August 28, 2010, from Key Trends in Globalisation: http://ablog.typepad.com/keytrendsinglobalisation/2010/07/us-2nd-quarter-gdp.html

Trade Unions Call for Investment as the Means to Economic Recovery

By Michael Burke

'The government's deflationary policies have been a major driver in our recession. They have cut growth and economic activity, reduced employment, driven down tax revenues and driven up unemployment costs.... borrowing costs increased. It's like running in quicksand – the more the government cuts, the more we sink. The dole queues, the emigration lines, and the vacant shop-fronts are a testament to government policy.' So says Jimmy Kelly, Irish Regional Secretary of UNITE, the union, writing in the latest Sunday Business Post .
In British Tory circles, the policy of the Irish government in moving straight to massive spending cuts is much admired, even if the outcome has been an embarrassment. Prior to the recession there was a small budget surplus. The deficit rose to 7.3% of GDP by the end of 2008 as the recession began to bite. But the policies of the Irish government in effect doubled it to 14.3% of GDP in 2009- and created the longest and deepest recession in Western Europe. Yet, while welfare payments to young jobseekers were halved, medical cards for the elderly withdrawn, and payments to single parents and the disabled were slashed, huge sums have repeatedly been found to bail out zombie banks. The €25bn to Anglo-Irish Bank alone dwarfed the spending cuts of over €14bn. If the bank bailouts are also included the deficit rises to just under 20% of GDP.
Despite all this, the debate in Ireland is frequently dominated by Thatcherite ideology, shared not simply by government supporters (who have dwindled to below 20% in opinion polls) but also by many of their supposed critics. One of these erstwhile critics, central bank Governor Honohan recently claimed in a New York Times article that 'no-one is arguing for stimulus.' This is not true, with ITUC General Secretary David Beg calling for investment, a view echoed by the main employers' association the IBEC.
In fact, Jimmy Kelly is calling for something far more productive than stimulus. 'This is not a traditional stimulus programme, whereby the government temporarily boosts demand until such time as the private sector gets back on its feet. It is an investment-led programme constituting a major drive to modernise our economic base and boost productivity.'
'Take the example of our physical infrastructure; our transport, telecommunications and energy networks are ranked as among the worst in the industrialised world. This is a major drag on growth, productivity and competitiveness. An investment drive that delivered next generation broadband to every house and business, a coherent public transport system, a water network that didn't leak and an upgrading of our building stock to the highest possible energy rating is the type of bold, creative vision we need.
'The best thing is that this will not cost the country any real money. Investment in wealth-creating and cost-reducing assets does not create debt – it creates an economic return which, in turn, reduces deficits and debt. We must invest our way to a balanced budget'.

Sales of Marx's Capital increase by 1000% in Germany

It has been the resurgence of Keynesian economics, led by figures such as Joseph Stiglitz and Paul Krugman, which has so far been the largest beneficiary from the crisis of the former 'conventional wisdom' in academic economics. However more radical views have also gained a wider audience. One index of this is a tenfold increase in the sales of Marx's Capital in Germany. An account of this, together with a rather accurate description of Marx's theory of crisis by Cliff Bowman, Professor of Strategic Management at Cranfield University School of Management, can be found in a video posted on the Socialist Unity website.

US 2nd quarter GDP figures - investment remains the key issue for US recovery

By John Ross

The publication of the US 2nd quarter GDP figures highlighted several striking and interlinked structural trends in the US economy. These go considerably beyond the well publicised slowing of the US economic recovery. They again make clear that the trajectory of the US economy will be determined by what happens to US fixed investment

The data confirms the US recovery is weak

Unsurprisingly, because it was anticipated, and as has been widely reported, the data confirmed the slowdown in US economic recovery. Taking the latest revised figures, annualised US GDP growth decelerated from 5.0% in the 4th quarter of 2009, to 3.7% in the 1st quarter of 2010 to 2.4% in the 2nd quarter.

US GDP remains 1.1% below its peak level in the 4th quarter of 2007. At the 2nd quarter’s rate of growth previous peak US GDP will not be regained until the 4th quarter of 2010.

Such figures have essentially decided the debate between those who argued that because the US downturn was very severe its economy would spring back strongly from recession, and those, such as the present author, who pointed to the underlying structural situation of the US economy and therefore argued recovery would be weak compared to previous US post-war business cycles.

Figure 1 illustrates how much weaker the present US economic recovery is than in previous post-war cycles. In the previous most serious post-war cyclical downturn, that following 1973, the US economy regained its previous peak level of production after eight quarters. In this recession after 10 quarters the US economy has still not recovered its peak GDP level.

As also widely reported, the new GDP data now calculates the US recession was deeper, and started earlier, than previously estimated. Peak US GDP is now analysed as having occurred in the 4th quarter of 2007 rather than the 2^nd quarter of 2008 as previously estimated. The trough of US GDP in the 2nd quarter of 2009 is now calculated to have been 4.1% below the cyclical peak level - the previous deepest fall in a US post-World War recession, that after 1973, was 3.2%.

Figure 1

The fall in US investment

The driving force of the depth of the US recession is also clear. It was due to the decline in US fixed investment. As shown in Figure 2, measured in constant 2005 prices, US GDP in the 2nd quarter of 2010 was $147 billion below its 4th quarter 2007 level. However several components of US GDP are already above their 4th quarter 2007 levels - inventories are up $63 billion, government consumption up $112 billion, and net trade up $135 billion. Consumer expenditure was below its 4th quarter 2007 level but only by $80 billion. But US private fixed investment was down $412 billion - dwarfing all other contributions to the recession.

Figure 2

Decline in investment centred in non-residential sector

This decline in US private fixed investment was not primarily due to the fall in residential investment created by the sub-prime mortgage crisis - as may be seen from Figure 3. The decline in US residential fixed investment, again in 2005 dollars, was $172 billion whereas the decline in non-residential fixed investment was $241 billion.

Figure 3

Fixed investment and inventories

A further feature indicating the specific pattern of US recovery is the financing of gross domestic investment - i.e. fixed investment plus inventory accumulation. Although, as noted above, US fixed investment remained severely depressed, nevertheless for the first time for four years there was a small upturn, of 0.5%, in the percentage of US GDP devoted to fixed investment in the 2nd quarter - fixed investment rose to 15.6% of GDP from its low of 15.1% in the 1st quarter of 2010. This reflected a stabilisation of the share of residential investment in GDP and a slight increase in the share of non-residential investment - see Figure 4.

Figure 4

However it is clear that the majority of the saving necessary to finance the small upturn in overall gross investment has come from a worsening of the US trade balance - i.e. from foreign borrowing. Since the low point of the recession, in the 2nd quarter of 2009, US fixed investment and inventory accumulation has increased its share of GDP by 1.6% - rising from 14.5% of GDP to 16.1%. However this increase was entirely due to inventory accumulation - the percentage of US GDP devoted to private sector inventory accumulation rose by 1.9%, from -0.6% of GDP to +1.3%. However US fixed investment declined by 0.2% of GDP in the same period - from 15.8% of GDP to 15.6% of GDP.

Precisely quantifying the contribution of borrowing abroad to the financing of inventory accumulation is not possible until the US balance of payments figures for the 2nd quarter are published in September. However US balance of payments figures are dominated by the US balance of trade. The US trade deficit has been steadily widening since the depth of the recession in the 2nd quarter of 2009 - see Figure 5.

The deterioration in US net exports in 2nd quarter 2009 to 2nd quarter 2010 was 1.1% of GDP - the trade deficit rising from 2.4% of GDP to 3.5%. This is equivalent to 69% of the increase in the percentage of GDP for investment - indicating that the majority of financing for the increased saving to finance inventory accumulation has come from abroad. Given that in this period there was no increase in fixed investment at all what is occurring is that the US economy has been borrowing abroad not to finance fixed investment but in order to fund inventory accumulation.

Borrowing from abroad to finance an inventory build up, rather than for investment in fixed assets which can increase productivity or capacity, cannot be considered a healthy pattern of growth.

Figure 5

How is the US economic downturn to be overcome?

The data above makes clear that the quantitative key to overcoming the US economic downturn remains the situation in US fixed investment. Some reports on the 2nd quarter GDP figures spoke of a 'surge' in US business investment in the quarter but this fails to place the increase in a long term context. Comparing 2nd quarter 2010 to 1st quarter 2010, total US private investment rose by an annualised 19.1% or by $84 billion in 2005 prices. This sounds dramatic until it is noted that between 4th quarter 2007 and 2nd quarter 2009 US fixed investment fell by $495 billion so that the 2nd quarter 2010's increase made up only 17% of the fall that took place to the trough of recession. Only if an investment recovery continues for many quarters will the severe fall in US fixed investment during the recession be made up.

Such a fixed investment wave, in turn, would have to be financed by an equivalent rise in savings and therefore either by a sharp increase in US domestic savings or a large inflow of foreign capital. The former would require compression of US consumption, which would be likely to create major political unpopularity for the Obama administration, while the latter would require a major widening of the US balance of payments deficit. So far, as noted above, the primary process which has taken place is a worsening of the US trade deficit.

Why does the US not launch a major state investment drive?

Some authors argue that the way out of this current situation is for the US to launch a major state financed investment programme - a coherent exposition of this argument is presented for example in Richard Duncan's The Corruption of Capitalism. The arguments of adherents of this view is that due to the debt laden situation of the US private sector, and therefore its inability to sustain large scale expenditure, the US government, to maintain economic demand, has in any case no option but to continue to run large scale budget deficits for the foreseeable future. Therefore, instead of being used to maintain consumption, as at present, the budget deficit should instead be used to increase investment. As Duncan argues:

'Trillion dollar annual deficits for the next decade may keep the United States from collapsing into a severe depression.... But they would do nothing to restore the economy's long-term viability... The trade deficit would still be massive... The country could continue to consume more than it produced as long as other countries continued to accept its IOUs. But with each year that passed, structurally the economy would become increasingly rotten...

'There is a much more attractive alternative future, in which the United States remains the world's dominant superpower with a revitalised, self-staining economy. That alternative requires a national industrial-restructuring programme in which the government would invest in 21st Century technologies with the goal of establishing an unassailable American lead in the industries of the future. That goal could be achieved at the cost of $3 trillion over 10 years.'(1)

Such a programme for reversing the US investment decline is intellectually coherent but unfortunately in practice it is impossible to deliver given the structure of the US economy. The reasons why this is the case also show why the the Obama administration has been unable to step in and launch any large scale state financed investment programme.

The first obstruction is political - any US administration pursuing such an approach would get little or no popular support for doing so. Popular political sentiment is not determined by GDP growth statistics, let alone investment statistics - about both of which most of the population knows little and cares less. Political popularity is determined by whether living standards are rising or falling. Whereas government programmes boosting consumption improve living standards, and therefore are popular, programmes boosting investment have no such direct effect and are therefore unlikely to be generate equivalent political popularity.

More fundamentally, at the economic level, large scale government intervention in investment would alter the balance between the state and private sectors in the US and increase the weight of the former. This would therefore require a sharp shift in the structure of the US economy and would also be strongly resisted on ideological grounds.

It is for this reason that while the Obama administration has been able to use the budget deficit with considerable effect to maintain both private and government consumption it has been unable to have any significant effect on US investment. As may be seen in Figure 6, expressed in current prices, the $41 billion increase in US state investment between the 4th quarter of 2007 and the 2nd quarter of 2010 offset only 8.5% of the $485 billion decline in private investment which took place in the same period.

Figure 6

Furthermore whatever increase in state investment did take place was almost entirely in the ideological acceptable, but economically unproductive, field of military spending. As may be seen in Figure 7, between the 4th quarter of 2007 and the 2nd quarter of 2010 while US Federal military fixed investment went up by $28.8 billion in current prices, Federal civilian investment went up by only $9.0 billion and fixed investment by the fifty US States went up by only $3.0 billion. Therefore not only was the total increase in US state investment far too small to offset the fall in private fixed investment but the increase in civilian state investment was negligible. Figure 8 shows the same trends in fixed price terms.

The idea of state action to overcome the investment decline in the US is therefore interesting in theoretical terms. But it is impossible to execute in the actual structure of the US economy.

Figure 7

Figure 8

China's response compared to the US

Several conclusions follow from the above data.

• It is evident why the US recovery from recession has been weak and is likely to continue to be so - a huge decline in fixed investment has to be made up.
• It is likely the US trade deficit will continue to expand. Financing a recovery in investment from US domestic savings would be likely to require compression or slow growth of US consumption which would be highly unpopular. It is therefore easier for the US economy to finance an investment recovery through expansion of foreign borrowing - i.e. to widen the balance of trade deficit.
• It is evident why China has come so much more successfully through the international financial crisis than the US. As has been analysed elsewhere the general overall characteristic of the present 'Great Recession', internationally and not simply in the US, is a severe decline in fixed investment. China's own stimulus programme however, by directly boosting investment, ensured that no such decline took place in China. On the contrary, the period following the start of the international financial crisis saw a sharp increase in fixed investment within China.The programme prescribed by Richard Duncan and others for the US - 'a national industrial-restructuring programme in which the government would invest in 21st Century technologies' - is impossible for the US to execute for reasons already analysed. However it appears to be rather close to what China is actually executing.
Far more successful economic performance by China than by the US therefore seems certain to continue in the next period with its concomitant consequences for the world economy.

Notes

1. Richard Duncan, The Corruption of Capitalism, CLSA Books, Hong Kong 2009.

Improved growth shows investment works – the 2nd quarter UK GDP figures

By Michael Burke

The British economy expanded at its fastest rate since the recession ended, up 1.1% in Q2 according to preliminary data. These data are often subject to substantial revisions, but the hope must be that, having been held over and scrutinised for 2 weeks, they are an accurate reflection of the pick-up in activity.

The latest growth rate represents a significant acceleration over the prior two quarters when the cumulative expansion was just 0.7%. But the pace of the recovery is almost exactly in line with the recoveries from both the 1980 and 1992 recessions, which were much milder and shorter than the recent slump. In both the 1980s and 1990s recessions the previous peak in activity was recovered after 3 years. At this similar pace it will take close to 5 years to recover the previous peak in activity.

There are two key factors which supported the modest rebound in activity- the depreciation of the pound and the 2009 Budget.

The fall in the pound has been precipitate. As the chart below shows, prior to the recession Sterling was valued at over 2 US Dollars, and fell by over 26% in 2008 and to a low of US/£$1.37 early in 2009. This depreciation and the recovery in global trade prompted a very modest pick-up in exports. In the Q1 GDP data (the preliminary Q2 do not provide a breakdown of the national accounts) exports are 2.9% above their recession low in Q2 2008.

Chart 1

At the same time government spending has been the main support for the recovery. Current government spending and government’s share of investment (gross fixed capital formation) have risen by a combined 12.6% since the recession began. In the course of the recession, government spending rose by £18bn compared to an aggregate contraction of £88bn. In the two quarters of recovery to Q1, the further direct effect of these two factors, export growth (£7.3bn) and increased government spending (£13.6bn) has more than accounted for the entire growth of the economy (£9.7bn). If, as reported, other sectors of the economy made a greater contribution to growth in Q2 – with construction said to add 0.4% to GDP in the quarter, it will be because of the direct and indirect support received from government spending.

Economic Outlook

These positive effects of increased government spending and a weaker currency are already beginning to wear off and the impulse being reversed. As the chart above shows, the currency has already appreciated by over 10% from its January 2009 low against the US Dollar, and Sterling has also been appreciating against the Euro, the currency of Britain’s main export markets.

It is also widely known that this expansionary fiscal policy is shifting into reverse, with significant cuts enacted and vastly more in the pipeline.

The forward-looking indicators of the economy are already warning of a slowdown, before those cuts bite. Recent surveys of both manufacturing and construction growth have both shown a levelling off in activity. But surveys of the service sector, which accounts for three-quarters of the economy, have seen a marked deceleration with the June reading the lowest for 10 months . As the Bloomberg news service puts it, ‘U.K. services growth slowed more than economists forecast in June after the government’s austerity measures to cut the budget deficit sapped confidence’. Both house prices and consumer confidence recently recorded their first falls in over a year.

Previous optimism that a pronounced slump would lead to a sharp recovery has given way to a more sober assessment. These are strong grounds for the view that the growth rate is already peaking and a slowdown likely later in the year. With the extraordinarily deep cuts planned by the ConDem coalition, a double-dip recession or a severe slowdown in recovery is a real threat.

The Deficit & Growth

It is evidently the case that a further increase in government spending would benefit the economy. It might even lead to a renewed decline in the currency, as the combination of relatively loose monetary policy and fiscal policy is held to be a prescription for currency depreciation.

But the argument of the government and its supporters is that there is simply no room to increase government spending. Drawing comfort from Liam Byrne’s crassly ignorant phrase, they argue that ‘there’s no money left’.

On that logic, of course, however desirable increased government investment might be to support the economy, it is not sustainable. Government finances would go to hell, with huge deficits, loss of credit rating, IMF missions, and so on.

All of which seems very compelling - except that it is factually incorrect. As SEB has previously noted, the 2009 Budget was moderately stimulative and that worked. Growth was higher than anticipated and the deficit narrowed as a result.

The latest trends in public finances confirm that point and amplify it, as well as providing a warning about the impact of cuts. In the December Pre-Budget Report Alistair Darling forecast a public sector borrowing requirement (PSBR) of £178bn in the current financial year. In his March Budget this year, that projection had fallen to £167bn. The Office for Budget Responsibility lowered it to £156bn and Osborne’s June Budget shaved it to £155bn. Yet they are all still playing catch-up to the trend improvement in government finances.

In the chart below we show the 12-month rolling total for the PSBR, which has consistently undershot official forecasts and has been falling outright since February this year, when it peaked at £144.4bn. In June it had declined to £143.1bn.

Chart 2

The reason for the undershoot in the deficit is that tax receipts are much higher than anticipated, up £8.3bn in the latest 3 months alone. In the latest 12 months, that is in the period after the 2009 Budget, total government spending is £36.8bn higher than in the prior 12 months. Of that, £3.4bn is increased interest payments, and therefore £32.4bn is the actual increase in government outlays on goods, services and investment. This boosted economic activity, and the taxes that derive from it. Taxes on production are £18bn higher in the latest 12 months than in the prior period. In addition, the rise in unemployment has only been a proportion of what was expected. This feeds into lower-than-anticipated welfare payments.

Yet according to official wisdom, this cannot be. Increased government spending ought to be leading to an increase in the deficit, not its narrowing. The reason that the forecasts on the deficit are so faulty is that they overlook or completely ignore the stimulative effects of government spending and its positive effects on government finances, both revenues and outlays.

That ignorance stretches into the labour movement. Ex-Chancellor Alistair Darling quite rightly ascribes the improvement in the economy to Labour government’s actions. But these were from the investment and increased spending of the 2009 Budget not his 2010 cuts Budget where he threatened to be ‘worse than Thatcher’. Further, the connection between this rebound in GDP and the improvement in government finances seems to have escaped him entirely.

By contrast, Brendan Barber says, ‘The impressive GDP figures are the result of fiscal stimulus and active policymaking. But continued growth cannot be taken for granted, and there is now a huge risk that cuts in spending will bring the recovery to a shuddering halt. Deficit fetishism still risks a return to a flat line economy’.

The TUC general secretary is quite right. Not only is the policy of cuts to public spending sure to weaken growth, but it threatens, as a result, to lead to renewed widening of the deficit.