Sounds sensible doesn’t it? Treat the national economy like you would a household budget. When your debts get too big, cut back on spending. Eventually you’ll get back on track.
But it’s not always that simple.
National economies differ from household budgets in an important way: a reduction in spending can lead to a reduction in income, particularly if public spending is removed from sectors that need it to maintain confidence so they are willing to take risks on private projects.
If a reduction in spending is enough to choke off enough new business, GDP is sent into reverse. Rather than reducing the deficit and stemming debt growth, both rise. Lower spending, negative growth and rising debt occur simultaneously – a triple whammy.
This morning, after I’d recovered from the shock that the UK had contracted by 0.2%, and thus slumped back into recession, my eyes fell on a second metric in the GDP data: that the construction sector had itself receded by 3% in that period, its worst quarterly return for three years. That has brutal repercussions: construction is on the cutting edge of the economy, it’s a major job-creator whose confidence feeds into the confidence of industry as a whole.
I called Joey Gardiner, assistant editor of Building, to ask what on earth had caused the slump. Lack of government investment, he said, almost in a heartbeat. The cuts to spending on building schools, hospitals and other public programmes had taken their toll. Orders went down, business confidence plummeted, fewer risks were taken, orders went down again. The triple whammy is leading to a vicious circle.
Make no mistake, today’s economic news is monumental. So rare a beast is the double-dip recession that the 15,000 Professional Manager subscribers that are under 35 have never lived through one. Many thousands more of our readers will have been in short trousers when the last one took place, in 1975.
If the government is to avoid their becoming an altogether more frequent event it may need to think again about how to get key industries like construction moving. The family piggy bank is unlikely to hold the answers.