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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Find the EU renegotiation demands dull? Me too – but they are important

It's an old trick: smother anything in enough jargon and you can avoid being held accountable for it.

I don’t know about you, but I found the details of Britain’s European Union renegotiation demands quite hard to read. Literally. My eye kept gliding past them, in an endless quest for something more interesting in the paragraph ahead. It was as if the word “subsidiarity” had been smeared in grease. I haven’t felt tedium quite like this since I read The Lord of the Rings and found I slid straight past anything written in italics, reasoning that it was probably another interminable Elvish poem. (“The wind was in his flowing hair/The foam about him shone;/Afar they saw him strong and fair/Go riding like a swan.”)

Anyone who writes about politics encounters this; I call it Subclause Syndrome. Smother anything in enough jargon, whirr enough footnotes into the air, and you have a very effective shield for protecting yourself from accountability – better even than gutting the Freedom of Information laws, although the government seems quite keen on that, too. No wonder so much of our political conversation ends up being about personality: if we can’t hope to master all the technicalities, the next best thing is to trust the person to whom we have delegated that job.

Anyway, after 15 cups of coffee, three ice-bucket challenges and a bottle of poppers I borrowed from a Tory MP, I finally made it through. I didn’t feel much more enlightened, though, because there were notable omissions – no mention, thankfully, of rolling back employment protections – and elsewhere there was a touching faith in the power of adding “language” to official documents.

One thing did stand out, however. For months, we have been told that it is a terrible problem that migrants from Europe are sending child benefit to their families back home. In future, the amount that can be claimed will start at zero and it will reach full whack only after four years of working in Britain. Even better, to reduce the alleged “pull factor” of our generous in-work benefits regime, the child benefit rate will be paid on a ratio calculated according to average wages in the home country.

What a waste of time. At the moment, only £30m in child benefit is sent out of the country each year: quite a large sum if you’re doing a whip round for a retirement gift for a colleague, but basically a rounding error in the Department for Work and Pensions budget.

Only 20,000 workers, and 34,000 children, are involved. And yet, apparently, this makes it worth introducing 28 different rates of child benefit to be administered by the DWP. We are given to understand that Iain Duncan Smith thinks this is barmy – and this is a man optimistic enough about his department’s computer systems to predict in 2013 that 4.46 million people would be claiming Universal Credit by now*.

David Cameron’s renegotiation package was comprised exclusively of what Doctor Who fans call handwavium – a magic substance with no obvious physical attributes, which nonetheless helpfully advances the plot. In this case, the renegotiation covers up the fact that the Prime Minister always wanted to argue to stay in Europe, but needed a handy fig leaf to do so.

Brace yourself for a sentence you might not read again in the New Statesman, but this makes me feel sorry for Chris Grayling. He and other Outers in the cabinet have to wait at least two weeks for Cameron to get the demands signed off; all the while, Cameron can subtly make the case for staying in Europe, while they are bound to keep quiet because of collective responsibility.

When that stricture lifts, the high-ranking Eurosceptics will at last be free to make the case they have been sitting on for years. I have three strong beliefs about what will happen next. First, that everyone confidently predicting a paralysing civil war in the Tory ranks is doing so more in hope than expectation. Some on the left feel that if Labour is going to be divided over Trident, it is only fair that the Tories be split down the middle, too. They forget that power, and patronage, are strong solvents: there has already been much muttering about low-level blackmail from the high command, with MPs warned about the dire influence of disloyalty on their career prospects.

Second, the Europe campaign will feature large doses of both sides solemnly advising the other that they need to make “a positive case”. This will be roundly ignored. The Remain team will run a fear campaign based on job losses, access to the single market and “losing our seat at the table”; Leave will run a fear campaign based on the steady advance of whatever collective noun for migrants sounds just the right side of racist. (Current favourite: “hordes”.)

Third, the number of Britons making a decision based on a complete understanding of the renegotiation, and the future terms of our membership, will be vanishingly small. It is simply impossible to read about subsidiarity for more than an hour without lapsing into a coma.

Yet, funnily enough, this isn’t necessarily a bad thing. Just as the absurd complexity of policy frees us to talk instead about character, so the onset of Subclause Syndrome in the EU debate will allow us to ask ourselves a more profound, defining question: what kind of country do we want Britain to be? Polling suggests that very few of us see ourselves as “European” rather than Scottish, or British, but are we a country that feels open and looks outwards, or one that thinks this is the best it’s going to get, and we need to protect what we have? That’s more vital than any subclause. l

* For those of you keeping score at home, Universal Credit is now allegedly going to be implemented by 2021. Incidentally, George Osborne has recently discovered that it’s a great source of handwavium; tax credit cuts have been postponed because UC will render such huge savings that they aren’t needed.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 11 February 2016 issue of the New Statesman, The legacy of Europe's worst battle