When Gordon Brown became chancellor in 1997, senior officials told him that the economy he was inheriting was in rude health – whereupon Brown apparently asked whether he was supposed to write a thank-you note. Given his legacy to his successor Alistair Darling, a thank-you note ten years on seems a remote prospect.
UK economy: Gordon Brown’s legacy
Darling faces a neighbour who will “presumably second-guess his every decision”, said Jeremy Warner in The Independent, and there is scant room for manoeuvre on the borrowing and spending front. Years of higher public spending have propelled the size of the state to significantly above the OECD average and left us with the worst fiscal deficit of any industrialised country apart from Japan. Public spending is now to be reined in sharply, and although the squeeze has not yet begun, there are already complaints from the public sector, noted Charles Moore in The Daily Telegraph. Slashing public spending is hardly a recipe for popularity, with the public or the party, as Gary Duncan pointed out in The Times.
Stretched public finances mean there is no cushion against the next downturn, the odds on which appear to be shortening as consumers are running on fumes. They have racked up record debts totalling £1.325trn and debt-servicing costs as a proportion of disposable income are at their highest since the end of the last recession, even though interest rates are far lower. Real disposable incomes have been squeezed by higher taxes, inflation and interest rates, as well as subdued wage growth, and expanded by just 1.3% last year – the slowest rate since 1982.
UK economy: What next?
Consumers are now running down their savings in order to keep splurging, with the proportion of disposable income saved falling to a near 50-year low of 2.1% in the first quarter. Strip out contributions to pension pots from employers, and the savings rate is negative.
Consumers are borrowing to finance their current consumption, “but at some point the savings ratio will snap back up and it will have serious consequences for the economy”, said Marchel Alexandrovich of Dresdner Kleinwort. With more interest-rate hikes in the offing to tame inflation, “the worst is yet to come”.
The squeeze on consumers already seems to be showing, with consumer confidence falling for the first time in six months in June, according to Nationwide, while the British Retail Consortium is expecting a “grim month” now that the effect of rate hikes is kicking in. No wonder New Look’s private-equity owners failed to shift the company this week. Thanks to the debt binge of the past few years, said The Economist, the economy is in danger of “a nasty slowdown”.