Off balanceMarch 2011
After three decades of improvement in the UK's economic position, between 2005 and 2009 the UK's GDP-per-capita has fallen from 12th to 16th in the OECD. This slippage began before the global financial crisis hit. Using the OECD GDP-per-capita data, this report calculates that:
- If the UK economy was as rich as the Danish economy (currently ranked the 10th richest nation in the world), every individual would be £1,581 better off on average.
- If the UK were as rich as Norway, the second most productive economy in the OECD, every person would be £12,869 better off on average.
Some commentators have argued that growth is a less important objective for developed economies than factors such as income inequality (recently discussed under the heading of "happiness"). In fact the current concerns of politics make growth more important, not less. In particular, growth will create the resources to address environmental and social concerns and growth will be crucial in financing pensions and other entitlements as populations age and ratios of dependants to workers rise.
The UK cannot just expect its position to improve. The OECD forecasts that by 2020, more than half of the world's GDP will be generated in emerging economies. This raises the stakes. The "growth strategy" for government in this new landscape remains the same as it was in the old - to introduce a range of market-friendly policies which will help increase the rate of return on investment in the UK.
There is a fashionable and understandable concern with "imbalances" - between sectors, regions, countries and between consumption and saving. But these imbalances are the symptom related to the problem, not the cause which lies in the emergence of significant "inter-temporal" imbalances. These are rarely discussed by policy makers and were created in the main by excessively loose monetary policy in the last decade, most notably by the Fed and, for different reasons, as a result of EMU.
Restoring inter-temporal balance, between spending today and tomorrow, will entail higher interest rates and policy must be directed to creating conditions in which this is consistent with strong economic growth.
Beyond that policy makers should be wary of predetermining the appropriate structure of the economy. Policy makers should accept that they cannot and should not predict the shape of the economy as to sectors and regional performance. On sectors, the notion that anyone, including financial regulators, has any accurate idea of the "right" size of financial services is fanciful and dangerous. On regions, the OECD has shown that developed countries have made little headway in reducing regional economic difference over the last 50 years despite using a variety of policy levers. The Coalition Government will also find it heavygoing.
Instead policy makers should approach a growth strategy under three headings: reducing public sector deficits, reforming public services and delivering a better business environment.
Of these, the first two are the most controversial in the current UK debate. Reducing the deficit is not without risks, but in all likelihood less than not doing so. A lower deficit is clearly desirable to allow the private sector to expand. Reformed public services will enable public spending to be restrained while meeting the demands for improved services. Poor performing education, health and welfare systems already impose significant costs on the wider economy.
In terms of a better business environment, focusing on the following six core areas would be more than enough:
- Lower marginal tax rates.
- Invest in infrastructure according to economic return, in particular using user charges such as road pricing.
- Addressing restrictive planning regulations.
- A healthy competition and failure regime.
- Reduced costs of employing people.
- A high wage, high productivity workforce.