UK recovery under way, but Govt needs to tackle causes of recession

The UK was the last of the G20 economies to emerge from recession, but its recovery now appears to be under way.

While still heavily indebted, households have seen their cashflows retrench aggressively, such that the savings ratio has risen from minus 1 per cent at the start of the recession to 9 per cent on the latest data.

History suggests that after such a big move upwards, the near-term imperative to save even more, especially given that the pace of job losses has slowed and confidence risen, is likely to diminish - leading to faster spending growth.

This is one reason, among many others, why the economy has probably begun to grow again.

However, British policy makers have yet to seriously begin to ensure that such a crisis is not repeated.

Sitting at the heart of the crisis, in Britain and globally, was an unprecedented build-up in financial and household indebtedness. Total UK debt to GDP rose from 173 per cent at the start of Labour's term in power to around 270 per cent today. Household savings rates, meanwhile, fell from 10 per cent to under zero - the product of financial liberalisation and too-loose monetary policy.

Labour, under then Chancellor and now Prime Minister Gordon Brown, borrowed year in, year out - since 2000 - and built up Britain's worst peacetime fiscal deficit when other countries were running surpluses.

This credit bubble saw over-inflated house prices, rising income inequality and a 30 per cent drop in the UK's purchasing power from the sharp fall of the pound. Over and above that, Britain has monetised its entire fiscal deficit from 2009. That is, it has created new money at the Bank of England which has, indirectly, been lent or given to the Government.

If history is any guide, there is a high risk that we will see a re-run, in some form, of the inflation issues that plagued the country in the 1970s.

With that backdrop, therefore, several policy suggestions make sense.

First, reduce ease of access to credit. Increase minimum monthly credit-card payments - or phase out the cards altogether. Increase, and legislate on, the minimum deposit required to buy a house.

Second, seriously consider moving away from the current international dollar-based monetary system, where the creation of credit and money has been increasingly liberalised and we have had more than 140 financial crises in the world economy.

And third, shrink the size of government, dramatically - the larger the government share of GDP, the slower the trend of economic growth.

Finally, address the systemic threat to the UK economy from the UK's banking system. With governments clearly backstopping too-large-to-fail banks, moral hazard - and ultimately income inequality - are enhanced.

A removal of many of the best-paid from the arms of, in effect, an explicit government guarantee would serve the UK economy well.

- INDEPENDENT