Larry Summers reminds Osborne that the UK economy is still smaller than before the crash

The former US treasury secretary points out to the Chancellor that while the US economy exceeded its pre-recession peak years ago, the UK is still catching up.

At the end of a week in which the Tories have become ever more boastful of their economic record, Keynesian lion Larry Summers delivered some hard truths to George Osborne at Davos this morning.

Summers, who served as treasury secretary to Bill Clinton and as director of Barack Obama's National Economic Council, rightly noted that, more than five years on from the crash, UK GDP remains below its pre-recession peak. He said (from 1:10 onwards): 

If you compare the United States and Britain, it was a couple of years ago that we exceeded our previous peak GDP, that’s something that is still being sought in Britain.

Indeed, while US GDP is now 5.6 per cent above its pre-crisis level (thanks in part to greater fiscal stimulus), UK GDP is 2 per cent smaller than in 2008. 

To this, Osborne responded by pointing out that the recession was deeper in the UK than in the US. He said: "We did have a much deeper fall in GDP and, for a banking sector that is the same size as the US’s, in an economy a fifth or sixth of the size, the impact of the financial crisis was even greater in the United Kingdom than it was in the States. The great recession in the UK had an even greater effect and we were one of the worst affected of any of the major western economies.

But as Summers (who is working with Ed Balls, his former Harvard pupil, on a transatlantic commission on "inclusive prosperity") smartly retorted:

The deeper the valley you are in, the more rapidly you are able to grow. 

It's also worth buying this week's NS to read Felix Martin on this subject. Here's an extract: 

When I first started out on the bond markets, an older and wiser colleague took it upon himself to warn me of the pitfalls of dealing with unscrupulous brokers. “Watch out for salesmen selling recovery stories,” he advised. “Never forget the definition of a bond that was down 50 per cent and then recovered 50 per cent. It’s a bond that has lost 25 per cent.” I can’t help thinking of this homely piece of wisdom every time I read another story about the UK’s loudly hailed recent recovery.

It is true that the UK’s gross domestic product (GDP) grew by nearly 2 per cent in the four quarters to September 2013, compared to barely more than 1 per cent over the whole two years before that.

The trouble is that this still left the economy nearly 2 per cent smaller than it was at the end of 2007 – more than six years ago. As my former colleague pointed out: when there’s been a precipitous crash, you need to pay attention to levels of growth as well as growth rates if you want to avoid bamboozlement by sales pitches.

Former US treasury secretary Larry Summers addresses the Wall Street Journal CEO Council on November 19, 2013 in Washington, DC. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Show Hide image

Stability is essential to solve the pension problem

The new chancellor must ensure we have a period of stability for pension policymaking in order for everyone to acclimatise to a new era of personal responsibility in retirement, says 

There was a time when retirement seemed to take care of itself. It was normal to work, retire and then receive the state pension plus a company final salary pension, often a fairly generous figure, which also paid out to a spouse or partner on death.

That normality simply doesn’t exist for most people in 2016. There is much less certainty on what retirement looks like. The genesis of these experiences also starts much earlier. As final salary schemes fall out of favour, the UK is reaching a tipping point where savings in ‘defined contribution’ pension schemes become the most prevalent form of traditional retirement saving.

Saving for a ‘pension’ can mean a multitude of different things and the way your savings are organised can make a big difference to whether or not you are able to do what you planned in your later life – and also how your money is treated once you die.

George Osborne established a place for himself in the canon of personal savings policy through the introduction of ‘freedom and choice’ in pensions in 2015. This changed the rules dramatically, and gave pension income a level of public interest it had never seen before. Effectively the policymakers changed the rules, left the ring and took the ropes with them as we entered a new era of personal responsibility in retirement.

But what difference has that made? Have people changed their plans as a result, and what does 'normal' for retirement income look like now?

Old Mutual Wealth has just released. with YouGov, its third detailed survey of how people in the UK are planning their income needs in retirement. What is becoming clear is that 'normal' looks nothing like it did before. People have adjusted and are operating according to a new normal.

In the new normal, people are reliant on multiple sources of income in retirement, including actively using their home, as more people anticipate downsizing to provide some income. 24 per cent of future retirees have said they would consider releasing value from their home in one way or another.

In the new normal, working beyond your state pension age is no longer seen as drudgery. With increasing longevity, the appeal of keeping busy with work has grown. Almost one-third of future retirees are expecting work to provide some of their income in retirement, with just under half suggesting one of the reasons for doing so would be to maintain social interaction.

The new normal means less binary decision-making. Each choice an individual makes along the way becomes critical, and the answers themselves are less obvious. How do you best invest your savings? Where is the best place for a rainy day fund? How do you want to take income in the future and what happens to your assets when you die?

 An abundance of choices to provide answers to the above questions is good, but too much choice can paralyse decision-making. The new normal requires a plan earlier in life.

All the while, policymakers have continued to give people plenty of things to think about. In the past 12 months alone, the previous chancellor deliberated over whether – and how – to cut pension tax relief for higher earners. The ‘pensions-ISA’ system was mooted as the culmination of a project to hand savers complete control over their retirement savings, while also providing a welcome boost to Treasury coffers in the short term.

During her time as pensions minister, Baroness Altmann voiced her support for the current system of taxing pension income, rather than contributions, indicating a split between the DWP and HM Treasury on the matter. Baroness Altmann’s replacement at the DWP is Richard Harrington. It remains to be seen how much influence he will have and on what side of the camp he sits regarding taxing pensions.

Meanwhile, Philip Hammond has entered the Treasury while our new Prime Minister calls for greater unity. Following a tumultuous time for pensions, a change in tone towards greater unity and cross-department collaboration would be very welcome.

In order for everyone to acclimatise properly to the new normal, the new chancellor should commit to a return to a longer-term, strategic approach to pensions policymaking, enabling all parties, from regulators and providers to customers, to make decisions with confidence that the landscape will not continue to shift as fundamentally as it has in recent times.

Steven Levin is CEO of investment platforms at Old Mutual Wealth.

To view all of Old Mutual Wealth’s retirement reports, visit: products-and-investments/ pensions/pensions2015/