My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
A few days ago an unusual report was published on Britain’s economy. It set out some good ideas about how to generate growth over the medium and long-term through infrastructure, innovation, education and skills.
More striking, for me at least, the London School of Economics (LSE) Growth Commission stressed that Britain approaches the future with very conisderable advantages, and an economy that is far from broken.
I count myself an optimist but even I was surprised at some of the findings about our recent economic history. In the past 30 years or so, for example, gross domestic product per head has risen more rapidly than in advanced-country competitors.
As the Commission put it: “Despite the current gloom, the UK has many assets that can be mobilised to its advantage, including strong rule of law, generally competitive product markets, flexible labour markets, a world-class university system and strengths in key sectors, with cutting edge firms in manufacturing and services.
“These and other assets helped reverse the UK’s relative decline over the century before 1980. Over the following three decades, they supported faster growth per capita than in the UK’s main comparator countries – France, Germany and the US.”
Yes you are thinking but wasn’t this all the City? The financial services sector may not be broken but it is badly damaged and likely to remain so for some time.
Again, however, the report finds that the idea of a City-dependent Britain before the crisis is an urban economic myth. Between 1997 and 2007 market (private) sector productivity, output per hour, grew by 2.8% a year, of which only 0.4% came from financial services.
Business services contributed twice as much (0.8%) to productivity growth, industry (1.1%) almost three times. On other measures, as the report notes, growth before the crisis was no “finance-driven statistical mirage”.
The problem since the crisis has, of course, been lack of productivity; jobs are up while GDP has struggled. Again, however, Britain has been far from alone on this. The pos-crisis producivity record has been almost identical to Germany, and similar to Italy and France. Only America stands out among the big advanced economies, because the shakeout of jobs was much more brutal there.
The Commission’s co-chairs were tLSE economics professors Tim Besley and John Van Reenen and its members included Rachel Lomax (ex Bank of England deputy governor), Chris Pissarides (Nobel prize-winning LSE economist), Richard Lambert (ex CBI director-general), Lord Browne (former BP chief executive) and Lord Stern (economist and climate guru).
The LSE is on a roll. Last week it was granted a Regius professorship of economics by the Queen, an improvement in royal relations compared with autumn 2008, when she famously asked at the LSE why nobody had spotted the crisis coming and was not impressed with the answer.
The Growth Commission uses a German word, Schadenfreude, to describe what it sees as the attitude many Britons have to the economy and the way it is reported, “revelling in stories of national decline”.
This is not just the bonkers fringes of the City, media and internet with their constant talk of imminent national collapse. It has always been the case that doom-laden economic stories are more likely to find their way to the top of a news bulletin or the front page of a paper.
The economy is the ultimate political football. Nobody is happier than an opposition politician when economic news is dire. Ministers rarely acknowledge the contribution of an opposing party, When did you last see politicians of different parties working together in the national economic interest?
Yet the lesson of the past 30 years is the reversal of a century-long relative economic decline was not the product of one leader’s time in office. It may have started with the Thatcher reforms of the 1
There are some very good recommendations in the report. On infrastructure, it calls for a new strategy board, planning commission and bank, to get plans approved, financed and implemented, particularly in transport and energy.
On “human capital” it calls for a range of further improvements in schools and teacher quality, and to ensure Britain’s universities can continue to attract international talent, by exempting bona fide students from the cap on net immigration. It also has a range of proposals for tackling the traditional Achilles’ heel, intermediate workplace skills.
These and other proposals to boost investment and innovation, including a greater competition in retail banking, a business bank and new regulatory incentives to encourage long-termism in investment decisions, add up to a meaty package, which politicians should take seriously.
Perhaps the most serious message, however, is for politicians themselves. One reason for the success of the past 30 years was continuity. Eighteen years of Tory government folowed by 13 of Labour offered a degree of stability. Labour did not tear up much it inherited from the Tories.
That cannot be guaranteed. The LSE Commission suggests a National Growth Council whose role would be to challenge governments when growth-friendly policies were not being pursued, and to offer the continuity to pursue a long-term growth programme. As it says: “The absence of stable machinery at the centre of of government makes it more difficult to develop a long-term strategy for promoting economic growth.”
Politicians are not good at the long-term, though perhaps the commitment to HS2, the new high-speed train, is an example of a new approach. Typically, they think of the next budget or, as now, the next Bank governor.
But, while the Right sees the solution in tax cuts, and the Left in boosting spending, and while Mark Carney is seen by some as an economic messiah, the solution to Britain’s growth difficulties does not lie with short-term fiscal and monetary measures.
People have to believe that history did not end with the crisis, and the Growth Commission offers some encouragement. It does not believe, for example, that Britain’s growth rate has been permanently lowered, or that “the pre-2008 improvements in the UK’s economic position relative to the EU and the US are likely to unravel”.
For that optimism to be justified, the economy needs a sustained increase in investment in infrastructure, private sector capacity, education and skills. The gauntlet has been thrown down. The politicians should pick it up.