GDP figures: how to reverse the trend

25 Jul 12
Philip Booth

Today's news of a continuing double-dip recession highlights the need for supply-side measures that will reverse the mistakes of the past 15 years 

An expanding private sector is the key to economic growth. The Labour Party seem to believe that fiscal stimulus is the key. However, with government borrowing close to record levels and showing no sign of reducing rapidly, that would be a huge mistake.

Indeed, the classic Keynesian problem of sticky real wages causing huge levels of unemployment and a prolonged slump does not seem to be occurring at all.

Real wages are falling and employment is rising pretty rapidly taking into account the restructuring of the public sector. Instead, we seem to have a serious growth problem related to falling productivity.

This cannot be cured by government borrowing.
There are many reasons for falling productivity. Some of them are outside the government’s control, such as low corporate investment caused partly by the huge uncertainty in the eurozone and the fallout from the financial crisis. However, a recent Bank of England article pointed the finger at the financial and energy sectors as being particularly problematic in terms of their productivity record.

The financial sector is being hampered by more and more regulation. Whatever one’s view on the long-term regulatory environment for the financial sector, the timing of this increase in regulatory burdens is woeful.

The energy sector is hampered by the declining productivity of North Sea oil fields, but also by the government’s incoherent green policies. The UK government seems determined to get the minimum possible reduction in CO2 emissions for the maximum possible cost!

More generally, regulation, high taxes and government spending are bad for productivity and growth. The rise in government spending in the last decade has, alone, probably knocked one per cent off the long-term growth rate. The government is reaping the consequences of trying to reduce a deficit by first of all raising taxes and only then reducing government spending. It should have looked at the spending side of the ledger first.

Whilst much is outside the government’s control, especially in the eurozone, the government can and must do more. The key measures it could take are: a serious liberalisation of planning law; deregulation of labour markets; an end to the completely incoherent 'green' policies; radical reform of the welfare state; and a complete reconsideration of recent reforms to banking and financial services regulation.

The fact that there are many factors impeding growth that are beyond the government’s control is not an excuse for inaction in those policy areas where the government can make a difference.

It is time for bold supply-side reform, much of which simply involves reversing the damage caused by the policies of the last 15 years.

Philip Booth is editorial director at the Institute of Economic Affairs



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