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| Britain's economic recovery: three key challenges to long-term growth | Britain's economic recovery: three key challenges to long-term growth |
| (7 days later) | |
| There is no doubt that the UK's short-term economic prospects are considerably brighter than they appeared only a few months ago. This is the result of a number of factors: as I explain in an article in the New Statesman, we should give the government credit for not digging us further into a hole by trying to stick to its original plans to cut the deficit. So the fiscal squeeze has been relaxed, at least temporarily, while a number of government schemes are boosting the housing market. | There is no doubt that the UK's short-term economic prospects are considerably brighter than they appeared only a few months ago. This is the result of a number of factors: as I explain in an article in the New Statesman, we should give the government credit for not digging us further into a hole by trying to stick to its original plans to cut the deficit. So the fiscal squeeze has been relaxed, at least temporarily, while a number of government schemes are boosting the housing market. |
| Meanwhile the external environment is much more benign than a year ago: the eurozone crisis is, if not solved, at least on hold, and the US economy has been recovering for some time. Poor policy and bad luck has delayed recovery, relative to our original forecasts and everyone else's, but has not removed the ability of the UK economy to generate growth. | Meanwhile the external environment is much more benign than a year ago: the eurozone crisis is, if not solved, at least on hold, and the US economy has been recovering for some time. Poor policy and bad luck has delayed recovery, relative to our original forecasts and everyone else's, but has not removed the ability of the UK economy to generate growth. |
| And with unemployment and underemployment still very high, the potential for rapid expansion exists. There is no sign of wage inflation, and with the Bank of England pledging to keep interest rates effectively at zero until unemployment does fall significantly, interest rates will not be going up any time soon. | And with unemployment and underemployment still very high, the potential for rapid expansion exists. There is no sign of wage inflation, and with the Bank of England pledging to keep interest rates effectively at zero until unemployment does fall significantly, interest rates will not be going up any time soon. |
| But looking beyond the immediate challenge of repairing the damage done over the past few years there is clearly more to be done. | But looking beyond the immediate challenge of repairing the damage done over the past few years there is clearly more to be done. |
| The business secretary, Vince Cable, pointed out on Wednesday that we should be wary of "complacency, generated by a few quarters of good economic data". As the chancellor rightly says: "the only sustainable way to raise living standards is to raise productivity." And in fact, prior to the crisis, the UK did quite well on this score. | The business secretary, Vince Cable, pointed out on Wednesday that we should be wary of "complacency, generated by a few quarters of good economic data". As the chancellor rightly says: "the only sustainable way to raise living standards is to raise productivity." And in fact, prior to the crisis, the UK did quite well on this score. |
| Over the past two decades – up to and including the recession – GDP per capita grew faster in the UK than in all our major comparator economies. Nor was this an unsustainable boom; while a small part of this reflected the growth of the financial sector, some of it illusory, the vast majority was because of improvements in the UK labour market, a more skilled workforce and a more competitive economy. None of those has gone away. | Over the past two decades – up to and including the recession – GDP per capita grew faster in the UK than in all our major comparator economies. Nor was this an unsustainable boom; while a small part of this reflected the growth of the financial sector, some of it illusory, the vast majority was because of improvements in the UK labour market, a more skilled workforce and a more competitive economy. None of those has gone away. |
| So we need to both build some of the successes of the past 30 years – and they were real – and address areas where we have underperformed. A medium-term growth strategy needs to reorient the UK economy towards equitable long-term growth that is less reliant on the financial sector, and more oriented towards investment and exports. I see three key challenges: | So we need to both build some of the successes of the past 30 years – and they were real – and address areas where we have underperformed. A medium-term growth strategy needs to reorient the UK economy towards equitable long-term growth that is less reliant on the financial sector, and more oriented towards investment and exports. I see three key challenges: |
| Young people | Young people |
| The UK has seen a remarkable, and remarkably successful, expansion of higher education over the last three decades. But a large proportion of those who don't go on to higher education end up without the skills that are useful in today's labour market – let alone those of the future. That means the prospect of insecure and temporary employment with few prospects, at best, and a prolonged period with no job, at worst. We need to improve schools, as has been done with remarkable success in London; ease the school-to-work transition; and address youth unemployment. Doing all this might help ease the pressure for restrictionist immigration policies, which the evidence suggests will do little or nothing to improve job prospects for young people, while reducing economic dynamism and productivity growth across the board. | The UK has seen a remarkable, and remarkably successful, expansion of higher education over the last three decades. But a large proportion of those who don't go on to higher education end up without the skills that are useful in today's labour market – let alone those of the future. That means the prospect of insecure and temporary employment with few prospects, at best, and a prolonged period with no job, at worst. We need to improve schools, as has been done with remarkable success in London; ease the school-to-work transition; and address youth unemployment. Doing all this might help ease the pressure for restrictionist immigration policies, which the evidence suggests will do little or nothing to improve job prospects for young people, while reducing economic dynamism and productivity growth across the board. |
| The welfare state | The welfare state |
| The UK public remains committed to high quality public services – education, health, and social care – provided largely free at the point of use. But it remains reluctant to pay the taxes necessary to fund them. This contradiction will intensify over time. One way or another, better-off older people – especially those who benefited from the long, house-price boom – need to pay more. There are lots of ways this could be done – higher property or inheritance taxes, or charges for services, all payable only after death – but we need to end the expectation among relatively well-off people that they are entitled both to depend on publicly financed services in their old age and to leave their houses to their children. | The UK public remains committed to high quality public services – education, health, and social care – provided largely free at the point of use. But it remains reluctant to pay the taxes necessary to fund them. This contradiction will intensify over time. One way or another, better-off older people – especially those who benefited from the long, house-price boom – need to pay more. There are lots of ways this could be done – higher property or inheritance taxes, or charges for services, all payable only after death – but we need to end the expectation among relatively well-off people that they are entitled both to depend on publicly financed services in their old age and to leave their houses to their children. |
| Short-termism | Short-termism |
| The UK faces a pervasive problem of short-termism in both the public and private sectors. In the public sector, this is manifested, paradoxically, in doing some things much too quickly and others much too slowly. We vacillate over the expansion of aviation capacity in the south-east and the formulation of a sensible regulatory framework for energy. But on the other hand, we rush to implement major, untested reforms of public services like education and health without proper piloting or evaluation. | The UK faces a pervasive problem of short-termism in both the public and private sectors. In the public sector, this is manifested, paradoxically, in doing some things much too quickly and others much too slowly. We vacillate over the expansion of aviation capacity in the south-east and the formulation of a sensible regulatory framework for energy. But on the other hand, we rush to implement major, untested reforms of public services like education and health without proper piloting or evaluation. |
| In both cases, these reflect the incentives on politicians to secure headlines for implementing their pet policies at the same time as avoiding alienating powerful interest groups. Meanwhile, in the private sector, we have too many businesses, large and small, that are unwilling or unable to invest, whether in physical or human capital. | In both cases, these reflect the incentives on politicians to secure headlines for implementing their pet policies at the same time as avoiding alienating powerful interest groups. Meanwhile, in the private sector, we have too many businesses, large and small, that are unwilling or unable to invest, whether in physical or human capital. |
| A credible strategy would set out a coherent long-term vision for the UK economy: a high-skill, high-productivity economy with structurally higher levels of investment, and a reasoned, patient strategy for getting us there, which would be equipped to survive changes of government. | A credible strategy would set out a coherent long-term vision for the UK economy: a high-skill, high-productivity economy with structurally higher levels of investment, and a reasoned, patient strategy for getting us there, which would be equipped to survive changes of government. |
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