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
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What's to be done about racial inequality?

David Cameron's words on equal opportunities are to be welcomed - now for some action, says Sunder Katwala.

David Cameron made the strongest, clearest and most high profile statement about ethnic inequalities and the need to tackle discrimination ever yet offered by a British Prime Minister in his leader’s speech to the Conservative Party conference in Manchester.
“Picture this. You’ve graduated with a good degree. You send out your CV far and wide. But you get rejection after rejection. What’s wrong? It’s not the qualifications or the previous experience. It’s just two words at the top: first name, surname. Do you know that in our country today: even if they have exactly the same qualifications, people with white-sounding names are nearly twice as likely to get call backs for jobs than people with ethnic-sounding names? … That, in 21st century Britain, is disgraceful. We can talk all we want about opportunity, but it’s meaningless unless people are really judged equally”, said Cameron.
While the proof of the pudding will be in the eating, this was a powerfully argued Prime Ministerial intervention – and a particularly well-timed one, for three reasons.

Firstly, the Prime Minister was able to root his case in an all-but-universally accepted appeal for equal opportunities. It will always prove more difficult in practice to put political energy and resources behind efforts to remedy discrimination against a minority of the population unless a convincing fairness case is made that values cherished across our whole society are at stake. Cameron’s argument, that any party which tells itself that it is the party of the ‘fair chance’ and ‘the equal shot’ must have a response when there is such clear evidence of discrimination, should prove persuasive to a Conservative Party that has not seen race inequalities as its natural territory. Cameron argued that the same principles should animate responses to discrimination when it comes to race, gender and social class. Put like that, wanting job interviews to be fair – by eradicating conscious and unconscious patterns of bias wherever possible – would strike most Britons as offering as clear a case of the values of fair play as wanting the best baker to win the Great British Bake-Off on television.
Secondly, Cameron’s intervention comes at a potential "tipping point" moment for fair opportunities across ethnic groups. Traditionally, ethnic discrimination has been discussed primarily through the lens of its impact on the most marginalised. Certainly, persistent gaps in the criminal justice system, mental health provision and unemployment rates remain stark for some minority groups. What has been less noticed is the emergence of a much more complex pattern of opportunity and disadvantage – not least as a consequence of significant ethnic minority progress.

Most strikingly of all, in educational outcomes, historic attainment gaps between ethnic minorities and their white British peers have disappeared over the last decade. In the aggregate, ethnic minorities get better GCSE results on average. Ethnic minority Britons are more likely, not less likely, to be university graduates than their fellow citizens. 

As a result of that progress, Cameron’s intervention comes at a moment of significant potential – but significant risk too. Britain’s ethnic minorities are the youngest and fastest-growing sections of British society. If that educational progress translates into economic success, it will make a significant contribution to the "Great British Take-Off" that the Prime Minister envisions. But if that does not happen, with educational convergence combined with current ‘ethnic penalties’ in employment and income persisting, then that potential could well curdle into frustration that the British promise of equal opportunities is not being kept.  Cameron also mirrored his own language in committing himself to both a ‘fight against extremism’ and a ‘fight against discrimination’: while those are distinct challenges and causes, actively pursuing both tracks simultaneously has the potential, at least, depolarise some debates about responses to extremism  - and so to help deepen the broad social coalitions we need for a more cohesive society too.

Thirdly, Cameron’s challenge could mark an important deepening in the political competition between the major parties on race issues. Many have been struck by the increase in political attention on the centre-right to race issues over the last five to ten years. The focus has been on the politics of representation. By increasing the number of non-white Conservative MPs from two to seventeen since 2005, Cameron has sent a powerful signal that Labour’s traditional claim to be ‘the party of ethnic minorities’ would now be contested. Cameron was again able to celebrate in Manchester several ways in which his Cabinet and Parliamentary benches demonstrate many successful journeys of migrant and minority integration in British society. That might perhaps help to ease the fears, about integration being impossible in an era of higher immigration, which the Home Secretary had articulated the previous day.

So symbolism can matter. But facial diversity is not enough. The politics of ethnic minority opportunity needs to be about more than visits to gurdwaras, diversity nights at the party conference fringes and unveiling statues of Mahatma Gandhi in Parliament Square. Jeremy Corbyn’s first speech as Labour leader did include one brief celebratory reference to Britain’s ethnic diversity – “as I travelled the country during the leadership campaign it was wonderful to see the diversity of all the people in our country” – and to Labour bringing in more black, Asian and ethnic minority members - but it did not include any substantial content on discrimination. Tim Farron acknowledged during his leadership campaign that the Liberal Democrats have struggled to get to the starting-line on race and diversity at all. The opposition parties too will no doubt now be challenged to match not just the Prime Minister’s rhetorical commitment to challenging inequalities but also to propose how it could be done in practice.

Non-white Britons expect substance, not just symbolism from all of the parties on race inequalites.  Survation’s large survey of ethnic minority voters for British Future showed the Conservatives winning more ethnic minority support than ever before – but just 29 per cent of non-white respondents were confident that the Conservatives are committed to treating people of every ethnic background equally, while 54 per cent said this of Labour. Respondents were twice as likely to say that the Conservatives needto do more to reach out – and the Prime Minister would seem to be committed to showing that he has got that message.  Moreover, there is evidence that ethnic inclusion could be important in broadening a party’s appeal to other younger, urban and more liberal white voters too – which is why it made sense for this issue to form part of a broader attempt by David Cameron to colonise the broad centre of British politics in his Manchester speech.

But the case for caution is that there has been limited policy attention to ethnic inequalities under the last two governments. Restaurateur Iqbal Wahhab decided to give up his role chairing an ethnic minority taskforce for successive governments, unconvinced there was a political commitment to do much more than convene a talking shop. Lib Dem equalities minister Lynne Featherstone did push the CV discrimination issue – but many Conservatives were sceptical. Cameron’s new commitment may face similar challenges from those whose instinct is to worry that more attention to discrimination or bias in the jobs market will mean more red tape for business.

Labour had a separate race inequalities manifesto in 2015, outside of its main election manifesto, while the Conservative manifesto did not contain significant commitments to racial inequality. The mid-campaign launch in Croydon of a series of race equality pledges showed an increasing awareness of the growing importance of ethnic minority votes - though the fact that they all involved aiming for increases of 20 per cent by 2020 gave them a slightly back-of-the-envelope feel. 

Prime Ministerial commitments have an important agenda-setting function. A generation ago the Stephen Lawrence case opened the eyes of middle England to racist violence and police failures, particularly through the Daily Mail’s persistent challenging of those injustices. A Conservative Prime Minister’s words could similarly make a big difference in the mainstreaming of the issue of inequalities of opportunity. What action should follow words? Between now and next year’s party conference season, that must will now be the test for this Conservative government – and for their political opponents too. 

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.