Reeves must get whatever growth she can
Improved standards of living are the foundation of modern democracy
Martin Wolf
© Ewan WhiteWhy has it become so difficult to run western democracies successfully?
“It’s the economy, stupid” as James Carville said during Bill Clinton’s presidential campaign in 1992.
He was talking about what matters to voters.
But it also matters for democracy.
People care about their standard of living.
Democracy is simply far stronger if it is possible for everybody to become better off.
Growth provides that.
Universal suffrage democracy was the child of modern economic growth or, more precisely, of our consistently increasing ability to produce goods and services people want.
Growth was the foundation of democracy.
It remains its foundation today.
One country where this is clear today is the UK.
The economy has become only a little better than stagnant. It is now a “zero-sum” economy: more for some means less for others.
Politically, this is almost impossible to manage.
Most obviously, it creates a chronic fiscal problem.
The government wants to bring the deficit under control, meet its spending commitments and not have to raise taxes.
Unfortunately, this combination is impossible in today’s slow-growth economy.
Above all, as a result of a more realistic productivity forecast from the Office for Budget Responsibility, the chancellor’s “fiscal headroom” is likely to disappear.
She must now make some hard choices in the Budget due in November.
The UK’s plight needs to be put in the wider context of the history of economic growth and productivity in the big western economies since the end of the second world war.
The period to the mid-1970s was a super-boom: trend annual growth in GDP per head was, for example, 4.9 per cent in Italy and 4 per cent in France from 1950 to 1974.
The growth was even higher in Japan, but only 2.7 per cent in the UK and 2.4 per cent in the US.
Even so, these rates were strong enough to deliver big increases in standards of living.
From 1974 to 2007, growth was significantly slower in Japan and the continental European economies.
But it remained vigorous.
In the UK, it barely slowed, to 2.3 per cent.
The same was true in the US.
Now consider trend growth in GDP per head since the financial crisis of 2007-2008.
In the UK it has been a mere 0.7 per cent.
In all other members of the G7 it has been below 1 per cent, except for the US, where it has been 1.5 per cent.
In Italy it has been close to zero.
In brief, there has been a huge slowdown in economic growth in the big high-income democracies since the financial crisis, with the partial exception of the US.
Exactly the same is true of two measures of productivity: GDP per hour worked and the rate of growth of total factor productivity (TFP).
In the UK, for example, the trend rate of growth in GDP per hour worked from 2007 to 2025 has been a miserable 0.5 per cent, only just ahead of Italy’s 0.2 per cent and France’s 0.4 per cent.
TFP is the unexplained residual, after we measure the contributions of capital and labour to growth.
It is held to measure “innovation”.
The average annual growth of TFP between 2007 and 2025 has been negative in all members of the G7, bar the US.
These figures are dramatically below those for 1951-74 for all countries and mostly well below those for 1974-2007, too.
They suggest that the rate of innovation reached a peak in the middle of the 20th century and has since declined sharply in wealthy economies, as Robert Gordon argued in his masterpiece, The Rise and Fall of American Growth.
Without faster growth politicians in countries like the UK, France and many others face a terrible choice: cut spending that people want, raise taxes that people feel they cannot afford, or allow explosive rises in public debt.
This, in brief, is the plight of Rachel Reeves.
The first priority must be to get whatever growth she can.
If there is to be a rapid and general upsurge in productivity, it will probably come from artificial intelligence.
It is also inevitable that this will accelerate “creative destruction”, which happened to be the theme of this year’s Nobel Prize in economics.
A great deal of the destruction will be of jobs.
In response, the UK needs to get closer to Danish “Flexicurity”, by allowing businesses to fire, and supporting workers in their efforts to get new jobs.
It should abandon efforts to make labour markets more inflexible: companies will not hire if they cannot fire.
Faster growth means embracing change.
Planning reform, above all, needs to mean something.
Again, the UK needs to create a more dynamic “start-up economy”, with the new businesses being created also supported to become world beaters.
Universities must play a central role in this.
Also crucial will be lowering the UK’s exorbitant electricity costs.
Not least, there must be much higher investment.
The UK has the lowest investment rate of any leading high-income economy: between 2007 and 2025, this averaged a mere 17 per cent of GDP.
Its national savings rate is still lower, at just 14 per cent.
This means it is very heavily dependent on foreign savings.
Radical pension reforms will play an essential part in raising both investment and savings rates.
Fiscal consolidation will require higher taxes.
In the absence of serious efforts to cut spending, which seem to be politically impossible, taxes must be raised.
The election commitments not to raise income tax and value added tax must therefore go.
Labour foolishly promised not to “increase taxes on working people”.
But the increase in employers’ national insurance contributions in the 2024 Budget was a tax on working people: does Reeves think it falls only on owners?
If the tax burden is to rise, the structure of taxation also needs improvement.
Fortunately, the system is in such a mess that radical change is both possible and beneficial.
I will return to that topic.
0 comments:
Publicar un comentario