Friday, 26 July 2013

Economic growth is good, but is it sustainable?

UK Gross Domestic Product (GDP) is estimated by the Office of National Statistics to have grown by 0.6 % in the second quarter of 2013. Good news for the economy? I hope so; but is it enough and is it the 'right sort of growth'? The problem is that there is no sign that this growth represents any fundamental change in the structure of the economy.

I make this point not to be churlish. If growth leads to recovery then that must be good, but only if it is sustainable. This is not simply a left wing  point. It is also the caveat voiced by the right-wing think tank, The Centre for Policy Studies. As their Ryan Bourne comments:

"Only by raising the productive growth path of the economy with a proper supply-side agenda (to increase expected returns to businesses when planning investments) and re-aligning policies over the coming years towards more of a savings culture will we able to generate the kind of long-term sustainable prosperity which policymakers pay lip service to. The alternative is continuing to live beyond our means – relying on cheap money, government borrowing and an inflated housing market to create the mirage of prosperity before an eventual adjustment."

In other words, the fear is that the recovery will have all the hallmarks of previous growth fuelled by unsustainable debt levels.  There really isn't anything in the government strategy to avoid this. Nor is there anything so far from Labour  that they have answers to this conundrum, how to get sustainable supply side driven growth. 

One problem is political. A strategy for sustainable growth doesn't work with the electoral cycle. It requires a long term structural change  and solid investment. It also requires policies to ensure that such growth is shared through the economy and the regions. Distorted, asymmetric growth will still leave many regions struggling with high levels of unemployment. A long term strategy would seek to build new skill levels in hard-pressed regions to help businesses grow. It is a strategy for at least a decade and not the five year election cycle. Structural change is often painful as there are winners and losers. We would need a strategy to help those badly affected  by such change. Structural changes in  the past have ignored this side of the strategy. This was true in the Thatcher period and the consequences were dire with regional decline. 


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