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

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When will Brexit actually happen? An Article 50 timeline

Knowing the precise date of "Brexit Day" depends on the outcome of numerous untested laws

It’s the question on the lips of every Leaver - what is the date Brexit will finally happen? Article 50 is set to be triggered no later than March 2017. But reaping the changes of a full removal from the Union could take a lot longer. From rewriting legislation to negotiating the diverse interests of the European Union, Brexit is going to involve a lot of waiting.

Will it still actually happen?

There are a few things that could trip up an exit from the EU, however unlikely that might seem. The House of Lords, who have already started their voting process on Article 50 could potentially block the bill, but is more likely to threaten to block the bill in an attempt to leverage amendments - such as the position of EU citizens in the UK. Amendments that the House of Commons unilaterally failed to pass.

Julia Rampen writes about every Remainer’s dream - some sort of backdoor challenge that The People’s Challenge, a campaign group, believe exist. According to the founders, it is entirely reasonable to revoke Article 50 at the end of negotiations, if Brexit is not a done deal.

Okay, so if it does happen, when?

Prime Minister Theresa May has stated that she wants to trigger Article 50, a clause of The Lisbon Treaty in March 2017, which gives a country two years to decide the terms of the departure. This puts Brexit approximately happening in Spring 2019, providing all the negotiations are complete in that estimated time period.

But in effect, this only means Brexit will begin in Spring 2019. The results of leaving the EU, such as all the changes to laws that were once determined by the Union, will take years. As for the economic promises made by the Leave campaign, they may take even longer (if they even exist). This leaving process will begin with The Great Repeal Bill - an as of yet unpublished bill created in order to help a transition from EU laws to UK laws. This bill essentially states that the authority of EU laws will be revoked, and “where practical” will be transposed to domestic laws, able to therefore be adapted as appropriate for the UK.

A telling part of the Government's briefing on The Great Repeal bill is the quote that adapting EU laws for domestic use “may require major swathes of the statute book to be assessed to determine which laws will be able to function after Brexit day” (Brexit Day not being a national holiday of mourning, but the day the UK officially leaves the European Union). This is where the core issue lies, that in theory we could have left the EU by 2019, but in practice, the changes that will invoke won’t be in play for years.

The main ambiguity with Brexit lies in the fact that these are relatively new and untested laws. Since it was written in 2009, Article 50 has never been invoked, so the estimation of a two year negotiation period is largely a theoretical one. Various MPs such as Philip Hammond, Chancellor of the Exchequer, have noted that the process would likely exceed the two year framework - something that could be dangerous for the prosperity of the UK.