15 June, 2011 - 07:57 By Kate Sweeney

Spreading the recessionary pain

The UK recession continues but it is frustrating that we see such narrow journalistic coverage of it. We see figures on overall sales, and overall this or that. A lot of interesting figures are left out.

One major area that seems to mostly escape media coverage is how different parts of the economy are affected. When figures are reported for the whole economy, such as GDP or inflation figures, they only tell part of the story.

They don't tell how recession affects different groups of people, but that is important too. Government may insist that 'we are all in this together', but the pain is not being spread at all evenly. We aren't. Retail spending figures show that 40% of people have made 'significant cutbacks' in their spending. And 60% haven't. The pain of recession is not felt equally by everyone by any means.

Since retailers have been forced to make dramatic cuts in prices, and interests are low, someone with a mortgage, stable job, and a stable salary may even be benefiting significantly from recession. Most people in the public sector and most of those in private companies that provide products and services that people have to buy such as fuel or food fall into this category. They would see increased energy prices for sure, but many other things would be cheaper for them so overall they are better off.

By stark contrast, someone in a small business in an area that is optional spend, may be seeing many of their customers disappear, while their fixed costs increase, so would be suffering greatly. Someone made redundant with little savings would see increasing costs and perhaps low prospects of re-employment so would be suffering even more. So it is clear that recession affects some people greatly and others not at all, and many even benefit from it.

There is very little in the way of action by government that affects this discrepancy. Indeed, actions taken to control inflation always target the people who are already suffering most. Increasing interest rates affects those with mortgages  and other debts most. It takes money away from those with least, so they can afford to spend even less, hence reducing market demand and prices. Of course it works as a tool, but it can hardly be described as fair, and yet it seems to be the only tool in the government's toolbox.

If more people are tightening their belts now because of increasing fuel prices etc, this will even further depress demand for optional goods and services, so that section of society already suffering most will suffer even more. We appear locked in a spiral down with those at the centre being pulled down fastest while those more distant are barely affected, at least on everyday stuff.

But they are being affected in other ways. For example, exchange rates with countries that are run differently are a good indication of relative performance but also rarely see media commentary. My wife is Swiss, so we travel between Switzerland and the UK occasionally and I remember getting a lot more francs to the pound. I got 2.36 Swiss francs to the pound 2.5 years ago, but only 1.36 today, almost 40% less. Looking at it the other way round, a Swiss person gets almost 75% more pounds than they did then.

That is quite a difference in just 2.5 years. So when a wealthier person wants to go on holiday or to sell up and retire overseas, the exchange rate drop will take effect.

Of course, the UK has to buy a lot of stuff overseas too, so falling exchange rates make imports more expensive. But once again, the pain here is felt far more by the optional expenditure part of the economy, because they can't pass price rises on so easily to the customer, whereas those in compulsory spend areas can.

How to fix it then? How can we spread the pain out better, helping those affected most at the expense of those so far unaffected? Actually, I don't think it is a good idea to do so.  If you are drowning, it doesn't help matters if I drown myself too unless it somehow saves you in the process.

Taxing people in safe jobs to pay those who are suffering would level the playing field but would only make it worse. The money would help pay their bills, but wouldn't increase demand for optional services so recession would continue, just affecting more people. But we do need to either reduce costs on the economy or to increase revenue. So we must address the core reasons for the problem. One is a severe lack of confidence, the other is too high public sector spending.

Stimulating demand for optional services needs confidence to be increased. If people believe they will still be in a good job, that their income will be fine, that they will be able to afford to spend today without jeopardising their ability to pay bills tomorrow, then we will see recovery. As recovery takes hold, confidence increases, spend returns to normal and everyone is happy again. That would work, but it requires both a solid recovery plan and good leadership, and that has been conspicuously in short supply in recent years. We have had at least two decades now of poor leadership. And we don't have a plan either.

I watched a documentary a while back that argued the case for a low flat tax policy, where government gets out of the way, there is minimal interference an regulation, and low taxes. No tax is paid by anyone up to a certain income threshold and then they pay 20% on everything above that, with no exceptions or exclusions. I was firmly convinced by the arguments. They made sense. If tax is low, enterprise happens, and increasing wealth quickly follows that. Key to this is having low spend in the public sector. Only then can taxes be made low. If the public sector is stripped to the bare minimum essential to run a low interference economy, then taxes can be low. Flat taxes require minimal computation and administration, so even this saves money.

By contrast, the UK has a huge public sector, most in secure jobs regardless of individual competence, with high financial reward (recent estimates suggest hourly compensation for a given public sector job is up to 40% above the equivalent in the private sector, due to higher salary, far higher pension, lower working hours and greater sick leave). With such high costs to the taxpayer, paying off national debts or reducing taxes will not be easy, and this will delay recovery. With high personal taxes remaining, many people simply will not have spare cash to drive it. The public sector is now far too big, and the country cannot afford it with the income its private sector generates.

It is clearly not sustainable to spend on debt continuously, and yet  the public sector resists any attempts to significantly reduce its spend, or even reduce increases in spend. A future generation must already pick up heavy bills for yesterday's overspending, but instead of accepting that it must end, they argue that spend must be maintained. It is quite farcical.

Clearly, only private sector enterprise can generate wealth, so recovery necessitates either reduction of funding to the public sector or even greater stimulus to the private sector to compensate for the increased drain. Taxes cannot be reduced without either extra borrowing or reduced expenditure. Extra borrowing would certainly end in catastrophe. So there is no other solution that greatly reducing public sector loading on the economy.

Out government has already made u-turns in many of its ventures, and is likely to back down from even modest cuts in the face of potential public sector strikes, but if it does, the unsustainability will remain, our debts will get even worse, we will be in an even worse position to recover from, taxes will have to increase, so recovery will be even slower, and the UK economy will continue to slip rapidly down the world rankings.

http://www.futurizon.com

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