GDP figures: how to reverse the trend

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Today’s news of a continuing double-dip recession highlights the need for supply-side measures that will reverse the mistakes of the past 15 years 

An expanding private sector is the key to economic growth. The Labour Party seem to believe that fiscal stimulus is the key. However, with government borrowing close to record levels and showing no sign of reducing rapidly, that would be a huge mistake.

Indeed, the classic Keynesian problem of sticky real wages causing huge levels of unemployment and a prolonged slump does not seem to be occurring at all.

Real wages are falling and employment is rising pretty rapidly taking into account the restructuring of the public sector. Instead, we seem to have a serious growth problem related to falling productivity.

This cannot be cured by government borrowing.
 
There are many reasons for falling productivity. Some of them are outside the government’s control, such as low corporate investment caused partly by the huge uncertainty in the eurozone and the fallout from the financial crisis. However, a recent Bank of England article pointed the finger at the financial and energy sectors as being particularly problematic in terms of their productivity record.

The financial sector is being hampered by more and more regulation. Whatever one’s view on the long-term regulatory environment for the financial sector, the timing of this increase in regulatory burdens is woeful.

The energy sector is hampered by the declining productivity of North Sea oil fields, but also by the government’s incoherent green policies. The UK government seems determined to get the minimum possible reduction in CO2 emissions for the maximum possible cost!

More generally, regulation, high taxes and government spending are bad for productivity and growth. The rise in government spending in the last decade has, alone, probably knocked one per cent off the long-term growth rate. The government is reaping the consequences of trying to reduce a deficit by first of all raising taxes and only then reducing government spending. It should have looked at the spending side of the ledger first.

Whilst much is outside the government’s control, especially in the eurozone, the government can and must do more. The key measures it could take are: a serious liberalisation of planning law; deregulation of labour markets; an end to the completely incoherent ‘green’ policies; radical reform of the welfare state; and a complete reconsideration of recent reforms to banking and financial services regulation.

The fact that there are many factors impeding growth that are beyond the government’s control is not an excuse for inaction in those policy areas where the government can make a difference.

It is time for bold supply-side reform, much of which simply involves reversing the damage caused by the policies of the last 15 years.

Philip Booth is editorial director at the Institute of Economic Affairs

 


5 comments on GDP figures: how to reverse the trend

  1. Responder says:

    Philip Booth sticks to his nostrum irrespective of any evidence to the contrary. As an undergraduate economist we treated the IEA as a rather silly joke with ‘mysterious’ funding sources, it’s depressing that they are still spouting the same ideology but are now given space in serious publications

  2. Alithino Onoma says:

    Interesting points but not clear why increased deregulation of the financial markets (the whole cause of the current economic situation) will solve the problem now. Not quite following the argument. The inflated pay conditions in the financial services sector just means that a few people will benefit hugely financially from deregulation and they will save up their excess money instead of spending it back into the UK market. Or they will invest it abroad.

    I am also not clear which examples the author is thinking about when referring to “…regulation, high taxes and government spending are bad for productivity and growth.” Iceland springs to mind as a good example here and the US is not faring very well following that line, apart of course from concentrating higher levels of wealth to a small proportion of people who then save it up in off-shore accounts.

  3. Warren Park says:

    The UK is suffering from a lack of demand that can’t be turned around by say a VAT cut. The population has aged and older people need to spend less to achieve happiness. People are reducing high levels of personal debt. Businesses are sitting on cash rather than investing in uncertain conditions including the Euro crisis and insolvency of large countries like Spain. Banks are rebuilding their balance sheets in accordance with international requirements. Governments are reducing deficits and in fact the UK is getting away with lots of talk but less action than many places already. Growth needs to come from exports to wider markets, efficiency improvements in the economic sectors, affordable capital investment in housing and infrastructure and taking a hammer to benefits spending and the EU budget amongst others.

  4. Mike Kay says:

    Reports already show that the UK has one of the most liberal set of employment laws out of all the economically advanced nations. Or is the author advocating the elimination of the minimum wage so that people can get paid ten bob and a bag of Chips an hour to increase employment. We should look at the German economy for pointers – a balanced economic nation(UK – all South East) high value economy, good qualifications, good pay excellent productivity. The policies advocated by the author sound like – stack ‘em high and sell ‘em cheap.

  5. philip says:

    Germany does not have a minimum wage as it happens. My point about the minimum wage was that, in a recession, it is not having a job that causes skills and productivity to decline and that most people who start on the minimum wage do not remain on it (because their skills improve). The success of the German economy is over-egged, but the point about productivity is true. Germany does, of course, have more liberal planning laws (as I would advocate), it is not imposing the sort of costs on energy that we are imposing and it does not have a welfare system as dysfunctional as ours.

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