Sunday, July 16, 2023
Faster growth is possible - if we do the right things
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

Growth is the issue of the moment, if only temporarily edging inflation aside. Official figures showed that the economy did not grow over the three months to May, and in May was smaller than a year earlier. Meanwhile, Jeremy Hunt used his Mansion House speech to sow some seeds of future growth. The mystery of growth and how to get it back is occupying his attention, as it is for others, as we shall see.

The chancellor and prime minister are desperate for growth. Indeed, it is one of Rishi Sunak’s five pledges. But the measures announced by Hunt were all about generating stronger economic growth in five, 10 or 20 years’ time, and they should be politically uncontentious.

The “Mansion House Reforms”, intended to get pension funds investing in new and unlisted growth businesses – with a target of 5 per cent of the assets of defined contribution pension funds to be in such investments by 2030 – have been criticised by some.

But, managed properly, this should be beneficial for the economy and the UK’s growth potential, and for pensioners. Other countries’ pension funds have been more innovative than the UK, notably those in Canada and Australia. In the case of Australia, funds invest 10 times the amount in private markets, relative to their size, as those in the UK.

These will be slow-burn changes, with further details set to be brought forward in the chancellor’s autumn statement, which he says will focus on such issues, not responding to the clamour for tax cuts among some Tory MPs. There is no magic bullet here. It took time for the UK to become a slow-growing economy, or as the Resolution Foundation think tank’s Economy 2030 inquiry described it, a “stagnation nation”, and it will take time to resolve it.

A new “growth commission”, launched by the former prime minister Liz Truss, popped its head above the parapet last week, and aims to investigate why all Western economies have experienced a slowdown in per capita gross domestic product (GDP) growth. It plans to use a new model to assess the medium and long-term impact of policies. Among members of the growth commission that you will never have heard of, its coup is getting the US economist Tyler Cowen on board. You may not have heard of him either but he is well known in economic circles.

I’m not sure about this new commission. It suffers from its association with Truss. Her connection with anything economic is a bit like a Boris Johnson commission on standards in public life. Its first report did not tell us anything new. It did tell us that if we could grow faster we would be better off, but anybody could have told you that.

It is also a bit late to the party. The London School of Economics’ growth commission was established 10 years ago and has made useful recommendations on infrastructure, skills, trade in services and other areas.

The Resolution Foundation’s Economy 2030 inquiry, launched in 2021, is overseen by a distinguished board, has published almost 40 useful reports and can also boast a top US economist, Dani Rodrik.

Let me offer a few thoughts, some of them drawn from this work. Why has growth slowed? It is an obvious point, but the best way to sustain growth is to avoid big recessions. The “golden age” for the global economy in the 1950s and 1960s, when UK growth averaged more than 3 per cent a year, was in large part due to post-war reopening and the removal of 1930s’ protectionist trade barriers.

What was characterised as “stop-go” economic policy then avoided significant recessions. That has more recent significance. If we look at the growth record in the 1990s and 2000s decades, it looks feeble, less than 2 per cent a year. But that was due to recessions at the beginning and the end of the period. In between, from mid-1992 to early 2008, when there was not a negative quarterly GDP reading for 63 consecutive quarters, the economy got its mojo back, growing nearly 3 per cent a year. In the 2000s, the Treasury thought the economy’s long run or “trend” growth rate was 2.75 or possibly 3 per cent a year.

Recessions do not just matter for the numbers. While economists like to talk about “creative destruction”, phoenixes rising from the ashes of failed firms, there has been scant evidence of that in recent recessions. They provide a setback which last beyond the point at which the economy starts to turn up.

Avoiding recessions, particularly when they are “acts of god” is not easy. Sometimes they are due to bad policy, as with the boom-bust recession of the early 1990s. And sometimes they are due to lax regulation, as with the financial crisis recession of 2008-9. But even if economies cannot avoid shocks, they can be made more resilient. The Covid inquiry is revealing a lack of preparedness and resilience in public health. There is a read-across in the economy’s lack of resilience in the face of shocks. The UK has performed worse than other major economies since before the pandemic.

Second, in a reverse of the golden age of the 1950s and 1960s, the world economy has experienced slower growth in world trade. This matters for a traditionally open economy like the UK and was compounded by the Brexit vote in 2016 and the election of an openly protectionist US president Donald Trump.

What a recent International Monetary Fund report described as “slowbalization” has been a feature, “characterized by a prolonged slowdown in the pace of trade reform and weakening political support for open trade amid rising geopolitical tensions”. Exports should be a driver of economic growth but have been weaker and comfortably outgrown by imports since 2010.

Then there is business investment. A recent Resolution Foundation report, ‘Beyond Boosterism’ described the problem well. “Firms in France, Germany and the US have invested 20 per cent more on average since 2005 – a gap that has cost the UK economy 4 per cent of GDP, and workers £1,300 in lost wages,” it said.

The chancellor has now hit on a policy, full expensing of qualifying corporate investment, the authors say is right. But it is only temporary and the UK’s corporate tax regime has changed every year since 2010. Even a better and more stable tax regime would leave a key challenge, “that too few British firms have large shareholders with a clear incentive and ability to hold management to account for having a long-term growth strategy”.

The chancellor made some first steps in trying to address that last week. There is a lot more to be said, and I shall return to this. We have been adept at shooting ourselves in the foot, but the UK has undoubted strengths, including world-class universities and comparative advantage in tech and artificial intelligence.

We also have plenty of weaknesses. Addressing them and playing to the strengths could give us a reasonable growth strategy, and move us away from a narrative, shared by most economists, that the best the UK can do in coming years is eke out paltry growth.