Inaction is now the biggest economic risk

The long-term cost of high unemployment to individuals and to society is huge.

The long-term cost of high unemployment to individuals and to society is huge.

Not surprisingly, NIESR's latest forecast, published today, has led to predictable headlines focusing on our prediction of a "return to technical recession." But this misses the point. We are forecasting that the economy will contract slightly in the first half of this year; some other forecasters agree, others don't. But the differences are within the margin of error; we could well be wrong. The point is that almost everyone expects, even assuming an eventual successful resolution of the eurozone crisis, that growth will be slow at best.

So what should be done? The UK economy currently suffers from deficient demand; the current stance of fiscal policy is contributing to this deficiency. A temporary easing of fiscal policy in the near term would boost the economy. The credible commitment to a sustainable fiscal policy over the longer term provides the government with the flexibility to provide a clearly defined and temporary boost to near-term demand. For example, an increase in government investment would not have a significant impact either on long-run sustainability or - given the way they are defined - the likelihood of the government meeting its fiscal targets.

It is important to be clear that this is not about averting a recession in the short-term. It doesn't matter very much, either to the economy as whole or to individuals, whether economic growth is 0.2 per cent or -0.1 per cent. This is about minimising the long term social and economic damage. On current forecasts - both ours, and that of the Office of Budget Responsibility (OBR) we are set for an extended period where growth will not be enough to reduce unemployment to the levels we saw before the recession. We expect unemployment to rise to about 9 percent - 3 million - this year and to remain high. Even in 2014, it will still be over 7 per cent. This compares to the OBR's estimate that the structural unemployment rate is about 5.25 per cent.

That difference - the "unemployment gap", shown in the chart below, is a measure of the how much extra (or less) unemployment there is as a result of macroeconomic conditions - i.e. cyclical unemployment resulting from labour demand, or lack of it (more explanation here). In other words, if macroeconomic policy is broadly on track, the unemployment gap should be small; it is a measure of the number of people who are not working because macroeconomic policy isn't either.

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The chart shows that the unemployment gap in the aftermath of the 2008 recession will be larger and longer than any recession since 1970 (which certainly means any recession since the war) including the early 1980s, although there is probably some uncertainty about the 1980s estimates. It says that - on the official view and the official forecast - the unemployment gap is a million now, rising, and will be higher in 2013 than now; and that even by 2015, fully seven years after the recession began, it will be over 2 percent of the labour force, about 650,000 people. Unemployment at this elevated level for such a long period is likely to do permanent damage to the supply side of the economy, with large long-run economic costs.

The argument about fiscal policy is often presented as "Yes, fiscal stimulus might do some good, but are you willing to take the risk?" In my view the risks are hugely exaggerated, as I wrote in this magazine. But people talk much less about the downside of inaction. If we do not do something to boost labour demand now, we are not just taking a risk, we are accepting the likelihood of continuing high levels of unemployment that will damage both many individuals and society as a whole. In 1925 Winston Churchill expressed his dismay that policymakers seemed to be "perfectly happy with at the spectacle of Britain possessing the finest credit in the world simultaneously with a million and a quarter unemployed." As Martin Wolf puts it, "How masochistic does one need to be?".

Jonathan Portes is Director of the National Institute of Economic and Social Research. His blog is http://notthetreasuryview.blogspot.com

Jonathan Portes is director of the National Institute of Economic and Social Research and former chief economist at the Cabinet Office.

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Donald Tusk is merely calling out Tory hypocrisy on Brexit

And the President of the European Council has the upper hand. 

The pair of numbers that have driven the discussion about our future relationship with the EU since the referendum have been 48 to 52. 

"The majority have spoken", cry the Leavers. "It’s time to tell the EU what we want and get out." However, even as they push for triggering the process early next year, the President of the European Council Donald Tusk’s reply to a letter from Tory MPs, where he blamed British voters for the uncertain futures of expats, is a long overdue reminder that another pair of numbers will, from now on, dominate proceedings.

27 to 1.

For all the media speculation around Brexit in the past few months, over what kind of deal the government will decide to be seek from any future relationship, it is incredible just how little time and thought has been given to the fact that once Article 50 is triggered, we will effectively be negotiating with 27 other partners, not just one.

Of course some countries hold more sway than others, due to their relative economic strength and population, but one of the great equalising achievements of the EU is that all of its member states have a voice. We need look no further than the last minute objections from just one federal entity within Belgium last month over CETA, the huge EU-Canada trade deal, to be reminded how difficult and important it is to build consensus.

Yet the Tories are failing spectacularly to understand this.

During his short trip to Strasbourg last week, David Davis at best ignored, and at worse angered, many of the people he will have to get on-side to secure a deal. Although he did meet Michel Barnier, the senior negotiator for the European Commission, and Guy Verhofstadt, the European Parliament’s representative at the future talks, he did not meet any representatives from the key Socialist Group in the European Parliament, nor the Parliament’s President, nor the Chair of its Constitutional Committee which will advise the Parliament on whether to ratify any future Brexit deal.

In parallel, Boris Johnson, to nobody’s surprise any more, continues to blunder from one debacle to the next, the most recent of which was to insult the Italians with glib remarks about prosecco sales.

On his side, Liam Fox caused astonishment by claiming that the EU would have to pay compensation to third countries across the world with which it has trade deals, to compensate them for Britain no longer being part of the EU with which they had signed their agreements!

And now, Theresa May has been embarrassingly rebuffed in her clumsy attempt to strike an early deal directly with Angela Merkel over the future residential status of EU citizens living and working in Britain and UK citizens in Europe. 

When May was campaigning to be Conservative party leader and thus PM, to appeal to the anti-european Tories, she argued that the future status of EU citizens would have to be part of the ongoing negotiations with the EU. Why then, four months later, are Tory MPs so quick to complain and call foul when Merkel and Tusk take the same position as May held in July? 

Because Theresa May has reversed her position. Our EU partners’ position remains the same - no negotiations before Article 50 is triggered and Britain sets out its stall. Merkel has said she can’t and won’t strike a pre-emptive deal.  In any case, she cannot make agreements on behalf of France,Netherlands and Austria, all of who have their own imminent elections to consider, let alone any other EU member. 

The hypocrisy of Tory MPs calling on the European Commission and national governments to end "the anxiety and uncertainty for UK and EU citizens living in one another's territories", while at the same time having caused and fuelled that same anxiety and uncertainty, has been called out by Tusk. 

With such an astounding level of Tory hypocrisy, incompetence and inconsistency, is it any wonder that our future negotiating partners are rapidly losing any residual goodwill towards the UK?

It is beholden on Theresa May’s government to start showing some awareness of the scale of the enormous task ahead, if the UK is to have any hope of striking a Brexit deal that is anything less than disastrous for Britain. The way they are handling this relatively simple issue does not augur well for the far more complex issues, involving difficult choices for Britain, that are looming on the horizon.

Richard Corbett is the Labour MEP for Yorkshire & Humber.