We can’t keep being surprised when we fall into traps keeping growth down, and trying to reform it with ‘pay as you go’ policymaking which only ever tries to tweak the edges, writes Lucy Harris.
Over the last year, we’ve heard warning after warning about the economy. If we needed another example, a recent a recent focus group provided us with an illustrative example of just how deep the level of pessimism is. “We’re on this hamster wheel and nobody’s helping us get off,” a respondent told Lord Ashcroft Polls, “There’s no light at the end of the tunnel. Nobody’s saying to us ‘this is going to be ok, we’re going to do this…it will be alright.’”
While hardly uplifting in its expression of the level of anxiety, it both diagnoses the problem and, if you look hard enough, offers a solution. Across the UK, many people believe economic recovery is a long way off and feel powerless to do anything about their situation, while increasingly losing faith in the ability of policy makers to do anything about it either.
While there are specific global issues fuelling the economic turbulence – not least Russia’s invasion of Ukraine and the aftermath of the pandemic – further cause for alarm is the longer-term decline in economic growth rates.
The UK is far from alone in this predicament – across Western Europe in particular, the typical 2-4 per cent growth rates seen in the past have given way to sluggish rates hovering around the 1 per cent mark in a good year, with economies teetering on the edge of recession in others. GDP per capita in the UK now stands at £36,568, less than 70 per cent of the US figure of £52,996. That number has fallen by at least 7 per cent since 2017. Other mature European economies are stuck on a similar trajectory to the UK: the equivalent German figures falling back from around 89 per cent to 83 per cent of US levels over the same time period. Annual productivity growth remains well below pre-2008 levels across the G7, but is particularly weak in the UK, France and Italy.
But, to go back to the quote I began with, by giving both policy makers and ordinary Brits the sense this can change, we can start to dispel the apathy that has come to characterise the post-pandemic zeitgeist.
None of this is inevitable – indeed it is vital for the future prosperity of the UK that we actively reject the lazy assumption that has taken hold among so much of the governing class that low growth rates are inevitable. The fact the US has managed to escape the same levels of sluggishness as Western Europe in recent years demonstrates that there are clearly policy approaches which can at least improve the UK’s relative performance in the short to medium-term, even while the broader decline of G7 growth compared to the rest of the G20 poses a more complex long-term issue.
However, without a serious attempt to understand the root causes of these increasing divergences, we risk being condemned to decades of decline.
The prevailing mindset of short-termism and “pay-as-you-go” policymaking; the habit tweaking rather than reforming for the long-term (such as in our planning and healthcare systems) which has come to dominate in much of the West, is clearly not delivering the systemic change that is required to return us to a high-growth trajectory. Indeed, this is why the Growth Commission was set up – to investigate the causes of the slowing down in GDP per capita growth worldwide and to analyse the impact of different policies on growth.
To start to move away from this reactive policy-making, we need to become accustomed to looking at the traps we continually fall into which prevent economic growth. For example, again and again, policymakers fall into the same stumbling blocks when trying to reform policy as varied as housing or competition. Everytime, we act shocked by the same result.
Last month, a report by the Growth Commission demonstrated the scale of the problem on a personal level, with the average disposable income for households falling by £1,900 between 2021 and 2022.
One of the first steps we should take is to move away from the static models favoured by Whitehall. These kinds of models, which only consider the direct effects of a policy change, with little attention given to how policies may alter the broader economic environment, routinely underestimate the negative costs of policy decisions on broader economic activity. Rather than taking a dynamic approach and looking at the economy as a whole, the kind approach operates in silos which enable the low-growth traps keeping us stuck.
Sluggish economic growth in the UK has been taken as an inevitability because we’re unable to instigate the genuine change of both mindset and approach. The challenge is significant, but for the sake of all of our future prosperity, it is one that we must rise to.