The political conference season is upon us, beginning this week with a virtual TUC Congress and ending in a few weeks with the Conservatives in Manchester. Occasionally, such conferences can be host to watershed moments for the economy.
For instance, in 1976 Prime Minister Jim Callaghan announced the end of the Keynesian economic agenda that had dominated since the second world war. Then, in 1980, at the height of a deep recession, Margaret Thatcher told us that the lady was not for turning, embedding Thatcherite economics that dominated policy thinking up until this pandemic.
Equally notable was the address in 1988 by European Commission President Jacques Delors to the TUC. In just thirty minutes he turned the labour movement from euro-sceptic to pro-Brussels. In response, two weeks later, Mrs Thatcher delivered her famous Bruges speech.
If ever there was the need for another game changing moment for the economy, it is now.
Policy helped the economy through the pandemic, safeguarding many jobs. But some areas, like the arts, were hit hard.
As we emerge from the pandemic the opportunity exists for the Prime Minister and Chancellor to unveil a vision that addresses the key economic problem: the need for stronger, balanced growth.
Growth supersedes inflation and closing the budget deficit as the major challenge. This links into the need to boost productivity and generate more well-paid jobs.
Last year I co-authored a report by Policy Exchange arguing for a three arrowed market friendly pro-growth vision.
One arrow is based on fiscal credibility. Understandably worries persist that higher interest rates could push debt servicing costs up. Yet, fiscal space can be generated by stronger economic growth, allowing the ratio of debt to GDP to fall steadily, without tax hikes.
A second is monetary and financial stability. While policy rates may stay low, quantitative easing should be reversed as it feeds asset price inflation and potential instability.
The third is a supply-side policy, supporting the green agenda and levelling up, through innovation and infrastructure as is already happening. Incentives backed by smart regulation and sensible taxes are central to this, helping investment and entrepreneurs.
Before the 2008 global financial crisis, the UK’s trend rate of growth was around 2.25%. Following that crisis, the trend rate continued to slip and by the time of the 2016 Referendum it was about 1.2% where it still hovers.
An economy that grows by 1.2% takes 60 years to double in size – in real terms – versus 32 years if growing at 2.25%.
This year the UK, like other major economies, rebounded solidly from the pandemic but has lost some momentum recently because of supply bottlenecks and the delta variant.
In July the UK economy was 2.1% below its pre-pandemic level. This output gap is equivalent to a deep recession and contributes towards the dovish mood at the Bank of England. Despite uncertainties, the economy should close this gap and return to its pre-crisis level before year end.
The post-pandemic rebound and policy boost means UK growth will be strong this year before moderating in 2022, although still above its pre-crisis trend. By 2023, however, the worry is the UK and other western economies may face pressure to tighten policies just as growth is slowing to the sluggish rate seen pre-pandemic.
It is only with stronger growth – and higher tax revenues that flow from this – that it is easier to address the challenges linked to public finances and tax that have surfaced over the last week in terms of paying for health and social care.
For if the Treasury believes trend growth is low they will argue that more of the budget deficit is structural, not cyclical, and has to be closed by higher taxes. The economy, though, needs lower not higher taxes to grow. That’s the problem. A pro-growth strategy is needed, if not in Manchester, then later this year.
This article was published in The Times on September 13th 2021.
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