With every passing week it becomes clearer that the British economy is in crisis. Not the ‘here today, gone tomorrow’ sort of crisis that bedevils the financial markets, but rather the deep-seated, slow-burning crisis of a progressive, life-threatening disease. ‘I am totally 100 per cent on it, and it is going to be okay and we are going to get through this,’ the Prime Minister promised last week. If so, he’s got his work cut out.
The economic performance of the UK economy has deteriorated sharply over the last decade-and-a-half compared to its performance beforehand. On key measures, such as output per hour worked, the UK was a poor performer even before the recent deterioration.
Unfortunately, there are few serious grounds for optimism. Unless there are fundamental reforms of the economy, the most likely scenario is that the UK staggers on with very low growth. As a result, living standards will barely improve and the country will inevitably slide down the international economic league tables. A weakening of British influence in world affairs seems likely.
It has become obvious that this economic crisis is at the centre of our wider woes. Without a much stronger economy, the ambitions of politicians of all parties for a better future for our citizens will come to nought.
There are few serious grounds for optimism
Our economic problems can be summed up in a single word: productivity. There is widespread cynicism about this situation and an especial pessimism about what governments can achieve. Yet there are many examples in post-war history of countries that have achieved an economic transformation.
It is true that some economic transformations have occurred without an explicit plan by government. No one set out the Industrial Revolution in the 19thcentury, for instance. And in the post-war period, the phenomenal success of Hong Kong occurred without a government blueprint. But most recent transformations occurred clearly as the outcome of a government’s strategic vision. This is even true of Hong Kong – and it was true of the economic revival that occurred in the UK in the 1980s and ‘90s a result of the Thatcher reforms.
Some of what is wrong with the British economy is of the state’s own making; some is not. Either way, when things are as malformed and malfunctioning as they are in Britain today, leaving everything to the market will deliver, at best, simply an efficient path to decline and disappointment.
Even if a prosperous future involves more use of market mechanisms, the market alone will not be able to get us to this result. It will require a programme of action by government.
Sometimes, what holds a country back is essentially macro. The UK exhibits two overall macro weaknesses today: the level and structure of taxation; and the level and type of real investment.
Nevertheless, these are both related to particular weaknesses in umpteen sectors of the economy. Accordingly, a sound investigation of our economic predicament must devote a good proportion of its efforts to analysis of our various micro failings.
After all, if we are to achieve a much lower rate of taxation, this will require a lower share of government spending in GDP. Achieving this in a sustainable and efficient way will require a reimagining of the role of the government across various sectors and a drive towards efficiency. Simply imposing across the board cuts would be stubbornly opposed. It would lead to gross inefficiencies and would probably in time be reversed.
Equally, sorting out the various micro problems of the economy can play a critical role in boosting real investment.
All the main political parties are desperately short of both ideas on economic policy and an over-arching economic vision. What’s more, the pressures of the political hullabaloo prevent them for giving sufficient time or resources to address these issues. What we need is sound assessment by independent analysts with the perspective, time and resources to devote to this all-important task.
What might this blueprint for economic revival look like?
Under a new programme that I will be leading at the think tank Policy Exchange, we are going to produce a series of self-standing analyses of the key issues, including the two macro questions referred to above. We will begin with an examination of recent economic transformations, including France and Germany after the war and a look at Mrs Thatcher’s reforms of the 1980s. Are there key lessons for the UK today? Is there a common theme to these stories of economic success? Subsequent studies will look at key parts of the economy which drag down economic performance: housing, health, education, welfare, roads, energy policy and the criminal justice system. When the series of studies is complete we will draw them together into an overall policy blueprint for Britain which goes from the analysis to quantified conclusions. Ambitious? Certainly. It is also absolutely necessary.
Roger Bootle is one of the City of London’s best-known economists, and director of Policy Exchange’s new Policy Programme for Prosperity
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