Julian Wolfson and Tim Bond: A two term growth agenda

Julian Wolfson (left) has worked in government, commercial and voluntary sectors. Tim Bond works is an investment strategist. They work at Odey Asset Management.

The economic cycle puts wind in our sails.  Growth is a fact.  The Government’s deficit stance has bought the UK time, and despite real risks UK plc is moving faster than people think.  Look through the impact of winter weather on the economy and annual GDP growth is above 2%, probably higher than the rest of Europe.  This is welcome, but only as far as it goes, and only for 2011.

The Spring Budget should launch a policy for growth beyond 2011 and set out a two-term agenda to deal with the weaknesses and seize the opportunities on offer.

We face two key long term economic risks.  First, the risk derived from excessive debt, particularly government debt.  This is something the public is starting to understand.  Second, there is resource price inflation risk, driven by the developing economies’ surging appetite for raw materials and the other building blocks of modernisation.

The debt is so big that the UK cannot afford – has no room to manage - recession.  Were we to have an unexpected downturn in 2012 it is questionable whether government finances would allow the normal operation of automatic stabilisers, let alone additional fiscal stimuli.  The cupboard would be bare.

Recession would mean ‘soft’ default on external creditors through currency falls, and domestic default on the covenant the British have with their government.  A series of actions would trigger in which successive, toppling governments would endeavour to make ends meet through welching on everything from free NHS treatment to help for the old, the weak and the young.  We HAVE to get growth now and at any cost other than a rising deficit.  Even at the cost of inflation.

The second problem, inflation, is more complex.  Neither simply good nor simply bad, it is both risk and opportunity.  Nor is it under our control when it is inflation which we import.