Much of the promise of the Labour government is focused on delivering economic growth. But that growth persistently refuses to happen. Other countries are facing problems too. France and Germany have low growth, but their economies are still larger now than before the pandemic, while Britain’s isn’t. Rachel Reeves’s trip to China may produce some trade and investment opportunities, but it is not going to solve the basic problem, so what the causes are and what can be done about them?
Cambridge Economist Diane Coyle suggests that while the economy slowed down since the financial crisis of 2008, the problems started before that. Investment has been in decline since the 1990s. All economies have had to face the shocks of Covid, Ukraine and Brexit, but we have been less resilient than many others. “That ‘s down to the long-term weaknesses, long term under investment in both the public and private sectors, and degradation of public services and infrastructure, which are just as essential if the economy is going to grow” she says.`
Commentators on the right tend to think that the problem is too much regulation and too high taxes. Liz Truss is perhaps the most extreme example of these ideas. The general drift of their ideas is to reduce both taxes and government expenditure. The Coalition Government after 2010 did this and it did not produce the desired results, but led to the hollowing out of public services such as the NHS, defence and local government. We are seeing the results now.
Economic instability
A strong public sector is not something which will deter economic investment. An underperforming NHS and poor infrastructure are deterrents to growth. These sectors both produce jobs and sustain the economy. It is well known that our transport sector is underperforming, Similarly, investment in the NHS, the Armed Forces and other vital public services will inject funding into the economy.
We now have a new problem. Because of past instability in the UK, and the international markets worrying about Trump’s threats to international trade, the cost of borrowing has increased. That means the UK and other countries have to pay more to fund any money they borrow.
Many economists now feel that stability is important for investment. The period 2019 to 2024 was one of instability. Rachel Reeves has stated that the cost of government expenditure must be met from taxation, not borrowing, and she will only borrow to finance investment. She does not want to appear to be living beyond her means.
Meanwhile the government is trying to find ways of cutting costs in public services without reducing their effectiveness. Problem is all these services employ large numbers of people, and although IT and AI could save money in administration, the only way to immediately reduce costs will be to make people redundant.
Investment is needed
Our economy desperately needs more investment. Our transport infrastructure needs renewal, particularly in the north. Many of our hospitals and schools are crumbling. The supposed “levelling up” policy has been a failure, and the regions need more investment, particularly in modern industries. Better infrastructure will encourage more private investment, but the big problem is it will take time.
The Chancellor has a problem. How to secure growth without damaging our already stretched public services before longer term benefits of improved infrastructure and administration kick in. People notice if their food bills continue to rise and they cannot see a doctor. No number of promises of future prosperity will abate these concerns.
So are there any policies which can produce results quickly and encourage economic growth?
Policies which can encourage economic growth
We now have a smaller available workforce than before the pandemic, whereas Germany’s workforce is now almost 2% higher, ours is 1% lower. Some young people have decided to study. Older people have retired early, and more people are receiving sickness benefits.
The government is now considering ways to deal with this and get more people into work. It is also encouraging investment with ideas such as merging pension funds to make investment easier. Government is providing some funds for investment, particularly in the regions.
The Brexit effect on economic growth and the economy
There is one policy which must be considered, whether it is popular or not, and that is the effect of Brexit. Brexit was a big shock for our economy. The Bank of England stated Brexit hit UK investment to the tune of £29 billion, since it became much harder for the UK to export to the EU and also led to a shortage of labour in the hospitality, agriculture and care sectors.
We need better trade arrangements with Europe. The EU has made it clear that it will not agree to easier trade arrangements unless we agree to the youth mobility scheme. This would enable young people (under 30) to live work, or study here for up to four years. This would be welcomed by hospitality providers in the Lakes and Highlands and also by the universities. It is not trying to reverse Brexit, and if it led to better trading arrangements with Europe it would both boost confidence and stimulate growth. As Stella Creasy MP has said “We can fight many things in life, but geography is not one”. Almost half our trade is still with Europe.
I know this will be politically difficult, but if we are to find a way of encouraging growth quickly it is something the government needs to do.
