29 Nov 2011

Economic growth – how to attain it

As Chancellor George Osborne announces that growth will be lower than forecast, Channel 4 News asks economists how they would boost activity.

As Chancellor George Osborne announces that growth will be lower than forecast, Channel 4 News asks economists how they would boost activity (Getty)

Tony Dolphin, IPPR

Just days ago, Tony Dolphin, senior economist at the left-of-centre Institute for Public Policy Research, published his 10-point plan for growth. Some of his recommendations bear a similarity to what Mr Osborne announced in his autumn statement – help for the young unemployed, tax breaks for business, infrastructure spending, the expansion of free childcare places. But there is a fundamental difference.

Mr Dolphin believes the government’s austerity programme of spending cuts and tax increases is moving ahead too quickly at a time economy activity needs to be stimulated, not stifled.

“The one thing he isn’t doing is increasing demand in the economy at the moment,” Mr Dolphin told Channel 4 News.

“The main problem is a shortage of demand because our main export market (the eurozone) is going into recession, households are being squeezed, and the government is cutting spending.

In this sort of world, the government is the only player who can increase demand. Tony Dolphin, IPPR

“There’s a Keynesian solution. In this sort of world, the government is the only player who can increase demand. It should be prepared to spend a bit more money.”

That is the key. The government argues that if it relaxes its austerity programme, the markets would turn on it, forcing it to pay higher interest rates on its borrowing.

But Mr Dolphin believes ministers should have allowed themselves more flexibility so they could respond to weak demand in the economy – and thinks the markets would have accepted this.

“It’s an open question if interest rates would rise if George Osborne did this today. If you keep saying you’re not going to change, you’re asking for trouble if you do. He should have allowed more flexibility years ago; tell the markets there is flexibility.”

David Kern, BCC

David Kern, chief economist at the British Chambers of Commerce, disagrees. He believes the sort of flexibility advocated by Mr Dolphin would hurt Britain’s reputation – and economic well-being.

Higher interest rates would more than offset any possible benefit to growth. David Kern, BCC

“I don’t accept this argument because I think it would damage our credibility. Higher interest rates would more than offset any possible benefit to growth.”

Mr Kern said the fact the interest rates the British government was paying on its borrowing were low reflected the “collective judgment” of the bond markets that this country was following the right path.

As Chancellor George Osborne announces that growth will be lower than forecast, Channel 4 News asks economists how they would boost activity (Reuters)

He said that in the longer term, growth would come through increased productivity and a skilled workforce. In the shorter term, increased spending on infrastructure was one way of boosting demand.

“There are many things that can be done, but you focus on those areas that don’t make the long-term position worse, like infrastructure investment and helping businesses to invest more.”

Mr Kern said there was no reason why the benefits of infrastructure development should take years to trickle down. “It’s not beyond our ingenuity to start spending money in three to six months.”

Jonathan Portes, NIESR

Jonathan Portes, director of the National Institute of Economic and Social Research, is a former chief economist at the Cabinet Office.

As a short-term measure to increase demand, he advocates a big cut in national insurance (NI) contributions paid by younger workers, those on low salaries and their employers.

This reduction would remain in place until unemployment fell significantly and would be funded by higher borrowing.

“It might mean cutting NI contributions to close to zero for those on lower than £15,000,” he told Channel 4 News.

Mr Portes disputed that a rise in government borrowing would lead to higher interest rates.

“The government’s predictions that if it borrowed extra there would be panic in the bond markets has proved to be wrong. We’re trying to deal with a weakness in private sector demand.

The government’s predictions that if it borrowed extra there would be panic in the bond markets has proved to be wrong. Jonathan Portes, NIESR

“The government is right in that over the longer term you need fiscal credibility. But the impact of proposals like this on the long-term sustainability of the public finances is close to zero. It would add a small amount to debt, but not very much, and at current rates it can borrow very cheaply.”

Mr Portes said the government’s plan for a review of public sector pay, that could lead to different rates across the country, was a good idea.

“Over the longer term, some of the measures the government is suggesting are quite sensible. Regional public sector pay is potentially quite beneficial to the public and private sector,” he said.

The argument is that public sector pay is too low in London and the south east, which means unfilled vacancies, and too high for private sector employers to compete against in some other parts of Britain.

“In the long term, it’s bad for London and the regions,” said Mr Portes.