Academic journal article National Institute Economic Review

UK Economic Growth since 2010: Is It as Bad as It Seems?

Academic journal article National Institute Economic Review

UK Economic Growth since 2010: Is It as Bad as It Seems?

Article excerpt

This paper reviews UK supply-side policies since 2010 in terms of their impact on growth and considers medium-term growth prospects in the context of the puzzle of disappointing post-crisis TFP performance. It is argued that there is no reason to believe that growth prospects have deteriorated significantly compared with the pre-crisis period. Changes in policy under the Coalition government are unlikely to have made a big difference to growth potential. On the one hand, this means opportunities for radical reform have been ignored; on the other hand, there has been no repeat of the 1930s' debacle.

Keywords: economic growth; industrial strategy; productivity puzzle; supply-side policy

JEL Classifications: NI4; 025; 052

Introduction

On the eve of the crisis, the growth performance of the UK economy was generally seen as quite satisfactory (Van Reenen, 2013). A long period of relative economic decline vis-a-vis other European economies seemed to have come to an end under the auspices of the supply-side policies initiated under the Thatcher government and continued in most respects by New Labour (cf. table 1). Subsequent developments have come as a rude shock; in 2014 quarter 2, real GDP per person was still only at 98.2 per cent of the previous peak level in 2008 quarter 1, while real GDP per hour worked at the end of 2013 was about 16 per cent below what would have been expected on the basis of its pre-crisis trend (Barnett et al., 2014).

The context for UK growth has changed in the past few years in several important respects. First, and most obvious, the economy has been through its worst financial crisis since the 19th century. This has surely had a permanent and sizeable adverse effect on the level of potential output and may even mean that estimates of future trend growth need to be revised down. (1) Second, the concept of 'secular stagnation' which haunted economists in the 1930s and 1940s has been re-discovered (Teulings and Baldwin, 2014) with the implication that long-term growth in all advanced economies may slow down as a result of unfavourable trends in demography and technology. (2) Third, a major consequence of the crisis is that public finances have been seriously damaged. This has raised the level of public debt to GDP significantly and has led the government to initiate what promises to be a lengthy period of fiscal consolidation. Fourth, the crisis has also raised questions about the structure of the UK economy, in particular, as to whether the financial sector had become too big and manufacturing too small. 'Re-balancing' the economy under the auspices of a return to 'industrial policy' started to be discussed for the first time in a generation. Fifth, the 2010 election resulted in a coalition government which has had to make compromises on economic policy between the Conservatives and the Liberal Democrats. There has been no possibility of coherent radical change on the scale of the Attlee or Thatcher governments.

All this prompts two questions which this paper will address. First, are UK medium-term growth prospects now much worse than would have been thought in 2007? Second, how effective have the Coalition government's supply-side policies been in improving likely future growth performance? Informed by modern growth economics, my approach to these questions will be based on the premise that government can affect the growth rate to some extent through its choice and implementation of supply-side policies and the main focus of this paper is to consider the government's record in this regard. I also take the view that the disappointing growth outcomes of the past few years do not of themselves make the answers to these questions obvious.

The paper proceeds as follows. In the next section, the details of recent growth performance and some future projections are presented in an internationally comparative perspective. Then, quantitative indicators of key components of supply-side policy are reviewed. …

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