Reasons to be negative about the UK’s growth prospects

In the 15 years to 2007, the British economy had on average faster growth (by about 0.5% to 0.75% a year) than its large European neighbours. A similarly benign context of rising trend output and tax revenues would be very helpful for a new government seeking to reduce government borrowing. There are, however, a number of reasons to be negative about the UK’s prospects for growth.

Firstly, labour force growth will slow from 2011, partly because that is the year the baby boomers start to retire, and partly because the heavy net immigration of the Labour years has become politically unacceptable and seems certain to be checked. In the years leading up to the recession UK employment typically rose by about ¾ per cent a year. From 2011 labour force growth is expected to be only ¼ per cent a year.

Secondly, while the rate of growth of productivity growth in the private sector was very satisfactory in the first decade of the New Labour government, the level of productivity in the public sector actually fell. Under Labour the public sector has also expanded relative to the private sector, with public sector employment up about 15 per cent since 1997.

Thirdly, associated with the expansion of the public sector has been a rise in taxation, particularly taxation on high earners and income from capital. This has started to cause the emigration of high-productivity, high-income people in international business services, the area in which the UK had been a leader after the Thatcher supply-side reforms and tax cuts of the 1980s. The City of London has been knocked off its perch, which may please the high proportion of the British population who are jealous of its success. The fact remains that the boom in international financial services accounted for about a fifth of the UK’s GDP growth in the 1997 – 2008 period.

Fourthly, in contrast with the reforms to energy supply under the last Conservative government, the environmental movement has led to a long pause in power station investment, and now an apparent rush for high-cost and wasteful renewable energy sources. The heavy resources required for, for example, offshore wind will not available for other more productive uses.

Fifthly, regulatory pressure on the banking industry will increase the cost of bank finance, with adverse effects on the financial viability of a wide range of projects, including investment projects in the utilities sector. A degree of leverage has been helpful in the past, because the return on capital has usually been higher than the rate of interest on borrowing. But with the banks widening margins and increasing fees, the utilities cannot borrow or invest as much as before.

The above is rather ad hoc, but the overall message has to be that the trend growth rate has fallen. No one can know how much. The drop in labour force growth might take about ½ per cent off the trend growth rate and the other factors may altogether have a similar effect. That implies a future trend growth rate of 1½ per cent a year, markedly less than the 2½ per cent a year which has been “normal” in the post-war period. The new government faces an economic challenge every bit as daunting as that which confronted Margaret Thatcher and her colleagues when they took office in 1979.

7 thoughts on “Reasons to be negative about the UK’s growth prospects”

  1. Posted 26/05/2010 at 10:33 | Permalink

    […] people are much more inclined to save during a recession even if they are not able to. Although most are being realistic/negative about where we are headed, some people are trying to remain upbeat. […]

  2. Posted 26/05/2010 at 12:08 | Permalink

    With high levels of debt the spending of both private and public sector will decline. This lost demand will hinder growth too. I cannot see real growth for a long time.

  3. Posted 26/05/2010 at 18:09 | Permalink

    There may be some counteracting factors to Tim’s predictions.

    The labour force may not shrink as fast as he expects, if people start retiring later.

    A switch from the public sector to the private sector may help increase the growth rate.

    Some of the higher tax rates can be reversed (for example, the 50 per cent rate of income tax), probably without a huge net loss of tax revenue.

    The last government’s ‘energy policy’ and climate change wastefulness could be reversed (though it may currrently seem unlikely).

    Although making such aggregate ‘predictions’ feels unsatisfactory, it’s not all bad news. I agree with Adam Smith: ‘There’s a deal of ruin in a nation.’

  4. Posted 27/05/2010 at 15:04 | Permalink

    ‘Firstly, labour force growth will slow from 2011′

    Make people work longer, especially in the Public sector. Require two C grades for university entrance. Sign off a five hundred thousand people. Reduce incapacity benefit. Deport illegals.

    ‘The fact remains that the boom in international financial services accounted for about a fifth of the UK’s GDP growth in the 1997 – 2008 period.’

    And just how close to financial meltdown were we in 2008? And how much have all the bail outs cost?

    Mrs Thatcher inherited a basically homogeneous society and also had the good fortune be elected just as the revenue from North Sea oil and gas started flowing into the Treasury.

    She had guts, unlike Dave.

  5. Posted 28/05/2010 at 01:24 | Permalink

    We need big ideas and big solutions to these problems, A labour force that is highly mobile and adaptable will be the one thing that works best for the UK. The more dirigiste mainland European states will find the going extremely tough. As long as our Labour laws are sensible and we make it so that it *pays* people to work rather than take from the State, we may be able to ride crisis this to a fairer outcome for everyone. The State has shown it can only be a part of the solution, but if left to interfere, most of the problem.

  6. Posted 10/06/2010 at 10:48 | Permalink

    Unemployment rose from about 5.25% in Jan/Mar 2008 to 8.0% in Jan/Mar 2010. Hence about 863 000 people who could rejoin the labour force. Again, 1 780 000 males in the 60-64 age bracket in 2008. Persuade a quarter to stay in work, adds about 445 000 over five years.

    How? Don’t pay unemployed not to work – cut benefits by 50%, 75% after 12 months, 100% after 18 months. No dole for school leavers, graduates, till 6 months full time, or 12 months part time work. Elderly – 10% flat rate of income tax, no deduction of pension if earning. No zero income tax rate – 10% minimum for everybody, then step up as now. Gets all in tax net. Large saving on dole, tax changes about balance.

  7. Posted 17/02/2011 at 11:28 | Permalink

    When the whole common market fails with the UK the people will realize how the governments are totally corrupt but it will be too late then!!!! Even if the people riot the clean up will be too late a joke really that man is destroying this planet only a nuclear war or some other massive disaster that would kill 5 billion people might save this planet…………..FOOD FOR THOUGHT!!!!!!!!!!

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