Douglas Carswell

Why we can't afford to gloat over Greece

All eyes are on Greece. A grossly indebted country, with underlying structural problems, has been living beyond it means for years. Something is going to give.

But might the same not be said about the UK economy too?

On the face of it, there is no comparison. UK output is rising fast, while GDP has collapsed in Greece. More jobs have been created in the UK in the past decade than there are jobs in Greece.

Yet before we get too cocky, the UK economic performance is not as good as it might seem.

For several years, our economy has been on the receiving end of a massive stimulus, both fiscal and monetary.

Despite all the talk of austerity, the government has in mathematical reality spent billions of pounds more than it has taken in tax, thereby injecting massive amounts into the economy. In doing so, the government has approximately doubled the national debt while adding a few percentage increases to output in return.

UK debt has grown faster than the economy. This is not the economics of a sustained recovery but of the credit card debtor.

Then there is the monetary stimulus. Governments have hosed cheap money and credit around to stimulate growth. Again, output has increased but, in the context of such a massive stimulus, not by much.

To get a sense of the economy's underlying strength, imagine if the stimulus stopped? What if the government ran a balanced budget? What if interest rates were back at the kind of level that incentivises savers to lend?  

House prices continue their dizzy upward spiral, especially in London. Savings ratios remain far too low. Household debt continues to rise. And our current account deficit – the difference between what we sell to the world and what we buy from the world – grows.

All of this, to me, suggests an underlying problem of chronic malinvestment: House prices rise not merely because of supply constraints, but because candy floss credit keeps being poured into bricks and mortar. Savings ratios are low because saving does not pay.

Household debt rises because monetary policy madness stimulates overconsumption. And the current account grows because monetary stimulus encourages us to live beyond our means, while the malinvestment it generates constrains the ability of companies to innovate and export. Oh, and malinvestment might also help explain Britain's chronic productivity problem too.

If the underlying UK economic problem is malinvestment, then one day that candy floss credit will have to come out of the system. It won't be pretty.

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