Why are we so excited about such low growth?

(Source: Reuters)

The reaction to today's economic news, a slight increase to GDP of just 0.3 per cent in the first quarter, displays a classic case of our obsession with round numbers (MarketBeat call this phenomenon 'rounditis'). We love base 10 numbers and fluctuations around zero. In this case, it's the latter.

However GDP figures came in today, we knew growth would be somewhere in the region of zero per cent (yet the OBR anticipated growth of 2.9 per cent in 2013). That we've avoided a technical triple dip means precious little, however we seem to weight it with great psychological importance. And why do we care so much about GDP? A large component of this measure is government spending. While an increase in GDP tends to be treated as unambiguously good, an increase in government spending is often anything but, as this expansion can crowd out credit and resources that could be more efficiently employed by the private sector.

Rebalancing also seems to have been unsuccessful. While government and financial services are doing well, others sectors such as manufacturing are looking no better. Politicians continue to block business from taking steps that could engender growth. Heathrow is an example of exactly the sort of project we've been told the coalition wants to back - supported by private money, shovel-ready, an infrastructure project - but blocked by the state, and just one example of somewhere that government could step out of the way.

But we can still be optimistic, as growth can be expected to return despite a bloated public sector and heavy levels of taxation. For that we can thank human ingenuity. Even if our politicians can't see easy ways to get growth back to the UK, many of us are more willing to be entrepreneurs than ever. But we could see this happen more quickly if serious attempts at deregulation were made. Mark Littlewood, director general of the Institute of Economic Affairs has called for politicians to free up our economy:

Regulation is strangling the economy, whilst high marginal tax rates are disincentivising people from working, saving and investing. The government must reduce spending, cut taxes and enact key supply-side reforms to encourage business and enterprise. For a growth revolution, we need a policy revolution.

Add a Comment

In Other News