The UK Government, headed by Gordon Brown, was forced yesterday to guarantee deposits in Northern Rock, a British retail bank. Thousands of panicking depositors had been demanding their funds in a remarkable scene for Britain: a run on a bank.
Now people are starting to wonder if the UK’s economy is as secure as is often thought. Borrowing from the future has been Mr Brown’s hallmark, whether it is raiding and creating a black hole in Britain’s private pension funds or abusing the (sensible) idea of the private finance initiative and Network Rail’s status to put liabilities on tomorrow’s taxpayer. Instead of concentrating on fundamentals like productivity growth, Britain’s economy has spent most of the last decade going on a big public sector binge.
Ever since Adam Smith’s image of the pin factory, we have recognised the importance of productivity increases in creating wealth in a sustainable way. Britain’s economy has many good points - in particular flexible labour markets and low unemployment - but Britain suffers from a productivity gap, with output per hour worked less than in France and Germany, and very significantly less than in the United States. Ever increasing taxes have been masked by the feel-good factor caused by rising house prices. Now people are being hit by increasing food prices too, and inflation - measured by the CPI - is higher than the EU average.
By relying on house price inflation, Britain’s economy has been resting on its laurels. It is a policy that works in the short term, but which ignores the fundamentals of the economy. It has restricted the ability of Britain’s young people to get on the property ladder, essentially redistributing wealth from young to old. Now it seems house prices have become impossibly high, and Britain is headed for a troubled time in future months.
Tags: Gordon Brown, Northern Rock, Productivity growth