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 Images
Show Hide image

What do Labour's lost voters make of the Labour leadership candidates?

What does Newsnight's focus group make of the Labour leadership candidates?

Tonight on Newsnight, an IpsosMori focus group of former Labour voters talks about the four Labour leadership candidates. What did they make of the four candidates?

On Andy Burnham:

“He’s the old guard, with Yvette Cooper”

“It’s the same message they were trying to portray right up to the election”​

“I thought that he acknowledged the fact that they didn’t say sorry during the time of the election, and how can you expect people to vote for you when you’re not actually acknowledging that you were part of the problem”​

“Strongish leader, and at least he’s acknowledging and saying let’s move on from here as opposed to wishy washy”

“I was surprised how long he’d been in politics if he was talking about Tony Blair years – he doesn’t look old enough”

On Jeremy Corbyn:

"“He’s the older guy with the grey hair who’s got all the policies straight out of the sixties and is a bit of a hippy as well is what he comes across as” 

“I agree with most of what he said, I must admit, but I don’t think as a country we can afford his principles”

“He was just going to be the opposite of Conservatives, but there might be policies on the Conservative side that, y’know, might be good policies”

“I’ve heard in the paper he’s the favourite to win the Labour leadership. Well, if that was him, then I won’t be voting for Labour, put it that way”

“I think he’s a very good politician but he’s unelectable as a Prime Minister”

On Yvette Cooper

“She sounds quite positive doesn’t she – for families and their everyday issues”

“Bedroom tax, working tax credits, mainly mum things as well”

“We had Margaret Thatcher obviously years ago, and then I’ve always thought about it being a man, I wanted a man, thinking they were stronger…  she was very strong and decisive as well”

“She was very clear – more so than the other guy [Burnham]”

“I think she’s trying to play down her economics background to sort of distance herself from her husband… I think she’s dumbing herself down”

On Liz Kendall

“None of it came from the heart”

“She just sounds like someone’s told her to say something, it’s not coming from the heart, she needs passion”

“Rather than saying what she’s going to do, she’s attacking”

“She reminded me of a headteacher when she was standing there, and she was quite boring. She just didn’t seem to have any sort of personality, and you can’t imagine her being a leader of a party”

“With Liz Kendall and Andy Burnham there’s a lot of rhetoric but there doesn’t seem to be a lot of direction behind what they’re saying. There seems to be a lot of words but no action.”

And, finally, a piece of advice for all four candidates, should they win the leadership election:

“Get down on your hands and knees and start praying”

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.