The National Institute of Economic and Social Research forecast for the UK economy, out last Wednesday, gained prominence in the press for its forecast of four straight quarters of recession and various downside risks. What was more significant, however, and little mentioned in the press, was its suggestion that the long-term sustainable growth rate of the UK economy should be downgraded in the light of these events to 2.2-2.3%. That compares with the UK government view of the sustainable growth rate as 2.75%. To give you a sense of what that difference means, after two decades of growing at 2.2% the economy would be about 10% smaller than if it had grown at 2.75%. That's an enormous difference.
If that's right (and I must confess it's a larger drop than I was expecting - though I have noted previously that state restriction of lending through nationalised entities and regulation will mean slower average growth in the economy) that will mean a huge number of perfectly prudent long-term deals entered into in 2005 and 2006 will now go bad - the profit and wage growth just won't be there over the long-term to sustain them. It's not how the NIESR would put matters, but I call it the price of Socialism.
Perhaps some enterprising MP could ask a Treasury Minister how much slower the government believes the economy will now grow over the next two decades, and how much slower the government wants the economy to grow and hence intends to reflect in its future regulation of lending? After all, in State Capitalist countries such as China, Dubai and the UK, it is the government as main distributor of capital that is the ultimate determiner of the growth rate of the economy.
