Today's sluggish growth figures show that the government has got to completely reconsider the role of the state in boosting the economy
On the face of it, today’s GDP figures aren’t as bad as they might have been. These are the first statistics to be released since the public spending cuts were ramped up in April, and the fact that this did not tip the economy back into the red should come as a relief. And for the optimists, there is the possibility that growth might have been much stronger had it not been for wedding celebrations in London and the tragedy in Japan.
But the real story is about how the recovery has faltered over the last year. The economy has now grown by just 0.7% in the last 12 months, a lacklustre performance that means our output remains far below its pre-recession peak. That has serious implications for the government’s attempts to control the deficit, and more importantly, for people up and down the country. With unemployment close to 2.5 million, and many public sector workers still facing redundancies, we need stronger economic growth to create more jobs.
Despite the sluggish performance of GDP, the labour market has been much stronger over the last year. More than 300,000 new jobs have been created, confounding the predictions of economists, including some of us here at The Work Foundation. But this job growth cannot continue indefinitely without a corresponding rise in output. Creating jobs without stimulating growth will also lead to falling productivity, which ultimately will squeeze people’s wages even more severely than at present.
The obvious question then, is what the government should do about this alarming lack of growth. Given the crises buffeting the Eurozone and America at present, it is perhaps understandable that George Osborne would want to stick to his deficit reduction strategy. But the government’s plan for growth needs a wholesale change of emphasis, one which focuses on the real drivers of growth in the UK economy and drops much of the 1980s-style rhetoric.
The government should be focused first and foremost on supporting innovation and investment by British businesses. The government has at times talked a good game on innovation – witness the Technology and Innovation Centres and investments in science and technology – but it has failed to put its money where its mouth is. The corporation tax cut, announced in this year’s budget, will cost £5 billion a year at its peak, but it is hard to believe that a marginal tax cut will influence business decisions to invest at a time of such economic uncertainty. Similarly, policies like enterprise zones, and vague promises to 'cut red tape', look more like gimmicks than part of a credible plan for growth.
To achieve this shift of emphasis, government must completely re-consider its role in the economy. Rather than seeing the state as a barrier to growth, the government must re-cast itself as the partner of business, providing the confidence and support that will encourage firms to invest and try out new ideas. This does not mean returning to industrial policy, but recognising that the state has a role in the economy, as a funder, a service-provider and a regulator. This role can be used to support enterprise, rather than stifle it.
Andrew Sissons is a researcher at The Work Foundation www.theworkfoundation.com
