This morning’s growth figures are the latest set-piece dust-up on the Government’s growth strategy. And as innumerable pointy-heads have made clear, the positive or negative sign on the front of the growth figure is really only of political significance, given the uncertainty around it. The broad picture remains one of stagnation. So we remain where we’ve been for a long time, debating what to do to get growth going.
There are broadly two views on this among the economic cognoscenti. Pessimists blame the lack of growth on the idea that the economy’s potential was massively damaged in the recession, arguing that we simply can’t expect the kind of economic rebound that usually occurs after a conventional recession.
Optimists, by contrast, think that the economy could be producing more and putting some of our 2.6 million unemployed people back to work if only government gave it a shove in the right direction. Overwhelmingly, economists are optimists in this debate. Most major forecasters think the economy’s potential is a fair amount higher than current output, suggesting lots of scope for government action. The IMF thinks output will be 4.4% below its potential this year. The Government’s official forecasters, the OBR, think we’re looking at a 3.6% shortfall. In human terms, that represents a lot of people on the dole with their skills getting rusty. What’s more the OBR think that large gap will persist for many years to come.
So where does the Government stand in this debate? The Chancellor claims to be a monetary activist and a fiscal conservative – working through the bank of England to encourage households and businesses to invest, borrow and spend money, while bearing down on the government’s own borrowing. With Plan A, there’s no doubt about his fiscal conservatism.
But nor is here a great deal of evidence of his monetary activism. The Bank of England operates monetary policy to meet targets set by the Treasury. But when he reviewed its remit at the budget, the Chancellor passed up the opportunity for some real monetary activism, like asking the Bank to worry about unemployment levels, for example.
There’s plenty the Chancellor can do to boost growth: he could go much further on monetary policy; he could borrow to invest in our dilapidated infrastructure at record low rates; he could switch significant sums of money from low- to high-growth policy measures; he could let people build on the green-belt. He could do all of these things if he really wanted to get the economy moving. But inaction rules: why?
There are two possible explanations. The first is that he lacks the necessary political courage to pull out all the stops. The second is that he simply doesn’t believe his own forecasters when they say that the scope for policy action is huge. Is the Chancellor a pessimist or just faint-hearted? Either way, right now we need the opposite.
What are Osborne’s options?
Take a look at the SMF’s “The Gordian Knot of Growth” and decide which you’d opt for.