Growth – Elusive, evaded and needed

There is no short-term solution to achieving growth, but more debt is not the answer.

There is no short-term solution to achieving growth, but more debt is not the answer.

We desperately need to get the UK economy growing to preserve or perhaps improve our standard of living, to deal with our debts and to stop the endless economic shambles that we have to abide every day.

We need to get back to long term economic growth – not the one night stand of some debt-fuelled bubble but something of endurance.

What drives growth?

A well educated and vigorous work force is a really good start. Although the UK has lots of education, much of it is not of direct economic benefit.

We need more vocational education in IT, electronics, engineering and other subjects that give rise to productive activity while wasting less potentially productive time in producing too many graduates in low utility courses in near inapplicable subjects.

Of course, that cannot be changed in a couple of years so is of no interest to our politicians whose time horizon is days, and most certainly not beyond the next election. No hope there then.

And sadly we are slowly suffering from demographics – less young highly productive folk and more oldies to support. No easy short-term solution exists here except encouraging productive young immigrants. But the Government is doing the opposite.

Then there are things our leaders can do to encourage people to grow businesses: lower taxes, easier regulation, less onerous employment laws and so on. Don’t hold your breath waiting for these to happen under current leadership – they promised all of these things but delivered the opposite.

In part this is because we have to follow EU rules seemingly designed to discourage enterprise – and of course much of the EU is in recession. Odd coincidence that.

Then there is the public sector problem. The evidence is compelling that economies where the state consumes too much grow slowly.

In places where over 35 per cent is being gobbled by the public sector, growth declines by around 0.1 per cent for every 1 per cent of public sector spend.

We are somewhere about 50 per cent so we should expect to grow say 1.5 per cent per annum less than our 2.5 per cent-ish potential. Add in weak demand from the Eurozone and no growth is pretty likely even if this blindingly obvious outcome is beyond our chancellor.

Now when our George came up with the first Budget of the coalition he tried to shrink the public sector as a proportion of the economy by very minor cuts (and this very largely in the infrastructure needed to sustain long term growth). He was also hoping and praying for growth in the economy rapidly diminishing the ratio of public spending to GDP. As George has found, prayers are not always answered.

In the absence of growth, the only way to cut the public sector share of the economy is to cut actual expenditure. Short term that means economic contraction but the growth that follows will mean a better medium-term future and actual growth. It requires courage and an ability to think beyond the next election – so it sadly will not happen.

Historically economies with high public debt tend to grow more slowly than those with less. Our debt is roaring up with the annual deficit adding around £100 billion to our debt each year. Again George’s prayer was that the deficit would vanish if the economy grew quickly enough for Government revenues to catch up with spending but in the absence of growth this simply is not happening.

Optimists and those anxious to avoid short term pain want to ‘solve’ the growth problem with more spending. Indeed endless ways to shovel money into the economy through the ‘printing of money’ in Quantitative Easing and other strategies may have lessened the pain today. But it has come at the expense of savers and pension funds which suffer from low interest rates. Because of the ever growing public debt in all its forms this short relief is at the expense of the next generation who will have to deal with the bills of the pain deferral from the current one.

More debt is intuitively a poor way to deal with a problem of too much spending and debt. But that’s the current ‘strategy’. We need to take the pain soon. Growth will only follow a painful readjustment.

If you can’t wait for a crisis and a painful readjustment; emigrate – well away from the EU.

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