The government action needed to get the economy growing again

Real GDP has now fallen for three consecutive quarters.

The Office for National Statistics has confirmed that the UK economy remained in recession during the second quarter of 2012 after output fell by a much bigger than expected 0.7 per cent. Real GDP has now fallen for three consecutive quarters and in five of the last seven quarters. Output is still 4.5 per cent lower than at its peak at the beginning of 2008.

There were some special factors in the second quarter that will have affected output: the extra Jubilee bank holiday and the atrocious weather. But it is unlikely that they fully explain the fall. The underlying economy is performing far worse than the Coalition and most economic forecasters expected.

Clearly, this is no ordinary economic downturn. There are two facets to the UK’s economic crisis: a short-term lack of demand and a long-term risk that the supply potential of the economy will be damaged. Any set of policies designed to promote growth in the UK must recognise this fact and tackle both. Failure to do so is likely to result in a failure to achieve the desired outcome: a speedy return to economic growth and a rapid decline in the number of people who are unemployed in the UK.

Improving the supply potential of the economy will be futile if it means demand falls ever further short of supply. Boosting demand in the short-term without supporting the supply potential of the economy in the long-term would risk recreating the problems that led to the financial crisis and recession. What is required is a judicious mix of ‘Keynesian’ and ‘structural’ policies designed to reduce uncertainty in the private sector, particularly among businesses.

A recently-published IPPR paper set out details of the policies that should now be pursued. In summary, they are:

  • Fiscal measures, including a two-year, 2p cut in the rate of employees National Insurance contributions, to boost growth in the short-term, while ensuring a credible plan remains in place to eliminate the deficit.
  • Additional infrastructure spending amounting to £30 billion over the next two years, including on transport, energy supply and social housing, to both lift demand in the short-term and to support long-term growth by encouraging private sector investment.
  • A further increase in the scale of quantitative easing, possibly involving the purchase of assets other than government bonds.
  • Measures to make household debt restructuring easier, combined with discussions about how to prevent large-scale mortgage repayment problems when interest rates eventually go up.
  • A job guarantee scheme for every person who has been out of work for 12 months or more in order to prevent people losing touch with the labour market.
  • An active industrial strategy focused on industries in which the UK has a comparative advantage and on areas where demand will grow rapidly in the future, such as the ageing population, emerging economies and the low-carbon transition.

This will involve an increase in planned government borrowing the short-term, but this can be done without jeopardising fiscal credibility. The IMF, in its latest report on the UK economy published just last week said: "The UK has the fiscal space to make such adjustments."

The coalition hoped that its deficit reduction strategy would boost the economy by creating greater confidence about the future, so leading to a surge in private sector business activity. After two years during which the economy has now shrunk by 0.3 per cent, this strategy has clearly failed. Indeed, the IMF estimate that fiscal consolidation over this period subtracted roughly 2.5 per cent from growth. Furthermore, the latest figures show underlying government borrowing in the first half of 2012 was higher than in the comparable period of 2011. A strategy based on deficit reduction is not even achieving its primary aim of reducing the deficit!

It is time to map out a new roadmap back to growth; one that combines elements of Keynesian and supply-side policies. A combination of both is needed to get the economy growing again in the next few years and to ensure growth is sustained well into the medium-term.

Tony Dolphin is Chief Economist at IPPR

 

Terrible construction figures show that the coalition's plan has failed. Photograph: Getty Images

Tony Dolphin is chief economist at IPPR

Photo: Getty
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The rise of the green mayor – Sadiq Khan and the politics of clean energy

At an event at Tate Modern, Sadiq Khan pledged to clean up London's act.

On Thursday night, deep in the bowls of Tate Modern’s turbine hall, London Mayor Sadiq Khan renewed his promise to make the capital a world leader in clean energy and air. Yet his focus was as much on people as power plants – in particular, the need for local authorities to lead where central governments will not.

Khan was there to introduce the screening of a new documentary, From the Ashes, about the demise of the American coal industry. As he noted, Britain continues to battle against the legacy of fossil fuels: “In London today we burn very little coal but we are facing new air pollution challenges brought about for different reasons." 

At a time when the world's leaders are struggling to keep international agreements on climate change afloat, what can mayors do? Khan has pledged to buy only hybrid and zero-emissions buses from next year, and is working towards London becoming a zero carbon city.

Khan has, of course, also gained heroic status for being a bête noire of climate-change-denier-in-chief Donald Trump. On the US president's withdrawal from the Paris Agreement, Khan quipped: “If only he had withdrawn from Twitter.” He had more favourable things to say about the former mayor of New York and climate change activist Michael Bloomberg, who Khan said hailed from “the second greatest city in the world.”

Yet behind his humour was a serious point. Local authorities are having to pick up where both countries' central governments are leaving a void – in improving our air and supporting renewable technology and jobs. Most concerning of all, perhaps, is the way that interest groups representing business are slashing away at the regulations which protect public health, and claiming it as a virtue.

In the UK, documents leaked to Greenpeace’s energy desk show that a government-backed initiative considered proposals for reducing EU rules on fire-safety on the very day of the Grenfell Tower fire. The director of this Red Tape Initiative, Nick Tyrone, told the Guardian that these proposals were rejected. Yet government attempts to water down other EU regulations, such as the energy efficiency directive, still stand.

In America, this blame-game is even more highly charged. Republicans have sworn to replace what they describe as Obama’s “war on coal” with a war on regulation. “I am taking historic steps to lift the restrictions on American energy, to reverse government intrusion, and to cancel job-killing regulations,” Trump announced in March. While he has vowed “to promote clean air and clear water,” he has almost simultaneously signed an order to unravel the Clean Water Rule.

This rhetoric is hurting the very people it claims to protect: miners. From the Ashes shows the many ways that the industry harms wider public health, from water contamination, to air pollution. It also makes a strong case that the American coal industry is in terminal decline, regardless of possibile interventions from government or carbon capture.

Charities like Bloomberg can only do so much to pick up the pieces. The foundation, which helped fund the film, now not only helps support job training programs in coal communities after the Trump administration pulled their funding, but in recent weeks it also promised $15m to UN efforts to tackle climate change – again to help cover Trump's withdrawal from Paris Agreement. “I'm a bit worried about how many cards we're going to have to keep adding to the end of the film”, joked Antha Williams, a Bloomberg representative at the screening, with gallows humour.

Hope also lies with local governments and mayors. The publication of the mayor’s own environment strategy is coming “soon”. Speaking in panel discussion after the film, his deputy mayor for environment and energy, Shirley Rodrigues, described the move to a cleaner future as "an inevitable transition".

Confronting the troubled legacies of our fossil fuel past will not be easy. "We have our own experiences here of our coal mining communities being devastated by the closure of their mines," said Khan. But clean air begins with clean politics; maintaining old ways at the price of health is not one any government must pay. 

'From The Ashes' will premiere on National Geograhpic in the United Kingdom at 9pm on Tuesday, June 27th.

India Bourke is an environment writer and editorial assistant at the New Statesman.

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