Is Osborne open for business?
30 November 2012
The UK is stuck in the longest period of stagnation in economic history. It's time for the Chancellor to ditch his fiscal framework and invest in policies that will stand the test of time, says former Cabinet Office and DWP chief economist Jonathan Portes
Talk about a "double-dip recession" after bad second quarter growth figures was overdone. But so was the euphoria about Britain "surging out of recession" after the third quarter. The underlying picture remains much the same as it has for two years – slow (or no) growth, and nothing like the sustained recovery we should be seeing.
This is primarily the result of premature austerity
– both in the UK and, even more damagingly, in the eurozone. In particular, the sharp cuts in public investment – down by almost half in the past two years – have clearly had a substantial negative impact, while exports have been depressed by the eurozone's fall back into recession.
So what are the prospects for 2013, and what could Chancellor George Osborne and his Autumn statement (5 December) do to improve them? NIESR's forecast suggests continued growth, but not fast enough to close the output gap or lead to a meaningful further reduction in unemployment. Fiscal consolidation, as well as contraction in the eurozone, will continue to weigh us down. The main short-term problem, as Vince Cable argues, is a lack of demand.
The government can borrow money for essentially nothing (
the yield on long-term index-linked gilts is close to zero). The UK suffers from creaking infrastructure and a chronic lack of housing supply, especially of affordable housing. In these circumstances, both common sense and basic macroeconomics suggest that it is the role of government to channel those private sector savings into demand and investment, by borrowing more if need be.
What would this do to the Chancellor's fiscal targets? Technically, nothing. The primary target, of eliminating the structural current deficit in five years time, does not include investment spending. Meanwhile, there has been much discussion of whether the Chancellor will miss the secondary target, of reducing the debt-GDP ratio in 2015-16 or whether, thanks to the accounting change with the Bank of England, he might just hit it. But this discussion simply illustrates the broader point; the Chancellor's fiscal targets,
while they may have provided a framework earlier in the parliament, are past their sell-by date. They are no longer adding much if anything to credibility, nor are they providing a discipline on policy. The Chancellor should announce a proper consultation on a medium-term fiscal framework that will stand the test of time.
Looking beyond macroeconomic policy, sustainable growth will require a whole host of policies: planning reform, increased aviation capacity, a clear and stable regulatory framework for the energy sector, better quality education for disadvantaged children, better childcare provision, clearer pathways from school to work for those who don't go on to higher education. On all of these, we know what the problems are, but successive governments have failed to address them. Sensible policies are in train, but implementation is patchy.
One policy area that currently works, however, is the labour market, which has performed extraordinarily well of late. Three decades of successful reform have given the UK a flexible and generally well-functioning market, suggesting that there is little to gain from further deregulation. The only significant labour market deregulation the UK needs is in immigration
policy, where, as business is increasingly recognising, policies are making it harder for businesses, especially growing and innovative ones, to recruit the sort of people the UK needs.
At the same time the government is doing severe damage to one of our largest export sectors, further and higher education. If the government is serious about making the UK "open for business", then it should drop its economically illiterate target for net migration and reverse restrictions on skilled immigration and overseas students.
We should not be too gloomy. The UK economy has many underlying strengths.
Since 1995, GDP per capita has grown faster than in Germany, France, Japan or the US. This reflects improvements in the UK labour market, a more skilled workforce and a more competitive economy. There is, of course, plenty to worry about. We are still stuck in the longest period of stagnation in recorded economic history, thanks to policy failures, both here and globally. But things could and should be better.
Jonathan Portes is director of the National Institute of Economic and Social Research. Twitter: @jdportes,
This article first appeared in Public Servant magazine