‘Clearly very big decisions are going to have to be taken about [the very big structural headwinds facing public finances].’
Andrew Bailey, Governor of the Bank of England
In his meeting with the Treasury Select Committee last week, Andrew Bailey set out these ‘very big structural headwinds’ as climate change, an ageing population, and the end of the ‘post-Cold War dividend’ in defence spending.
His warning underlined the Office for Budget Responsibility's warning last year that public debt over the next fifty years would nearly triple to 270% of GDP without action being taken to improve the country's health and lift productivity growth.
No wonder Rachel Reeves is putting so much emphasis on growth.
The problem is, however, that the main measure of growth, GDP or ‘Gross Domestic Product’, is fast losing its relevance as a feature of everyday life, as low-cost or free technology has done away with a reliance on so many basic physical activities, such as excess travel or printed media. Meanwhile, wherever possible, automation is replacing manual labour, and this will have been accelerated by the Chancellor’s own imposition of a substantial increase in Employer’s National Insurance in her recent Budget.
As our economy is increasingly demonetized by all these technical developments, the precarious state of public finances is fast becoming a relic of old-world thinking where so much of GDP was composed of basic needs, which do not in themselves add much to the quality of life — such as, for example, excess travel for ‘in-person’ meetings.
We first commented on this on 20th April 2020 at the start of the pandemic, explaining how the chronic deflationary period leading up to that point reflected continuous technological demonetization (the use of technology to make a product or service cheaper or free, or indeed to wholly remove the need for a product or service with a monetary value: thereby excluding that element from measures of economic turnover). Much has happened to disguise the situation since then, with supply disruption caused by the pandemic and energy price increases caused by the conflict in Ukraine pushing a temporary spike in inflation, which may now be prolonged by Trump’s tariffs.
But the underlying systemic demonetization resulting from the technological and automation transformation continues remorselessly; you only have to look at the European Central Bank making its fifth interest rate cut ‘in an attempt to kick-start its economy’ to see that the long-term deflationary pressures remain. This does not bode well for GDP growth. Meanwhile the growth and inflation seen in the U.S. over the past ten years has only occurred as a result of doubling its national debt.
What can be done?
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