We must get back to debating low productivity, low investment, low wages and regional imbalances
What is today’s most pressing economic issue?
The average reader of newspapers and the blogs would probably think that it is Britain’s decision to leave the EU. News reports continue to cite predictions of dire economic consequences from implementing the referendum decision.
Despite what you might have heard, Britain outside the EU is likely to be a far wealthier country in 2030 than it is today. How much more wealthy depends a little on the nature of the trading relationship with Europe but it depends a lot on the issues that concerned us before June – low productivity, low investment, low wages, low inflation, low returns on savings, the current account and the imbalances between regions and sectors.
That this idea seems surprising is partly because too many of us are still fighting the referendum. We remainers see every piece of bad economic news as vindication of our position. The other side at least get to cheer when the news is good.
The exaggerations of the campaign still colour our understanding.
Take for example the Treasury study whose central prediction was that Britain’s GDP would be 6.2 per cent lower outside the EU in the long term. That’s the figure Mr Osborne turned into an unbelievable £4,300 loss for every household. (I doubt Mr Osborne ever met a statistic he couldn’t torture into saying what he wanted it to say.)
The figure came from a serious study so let’s take it seriously: after 15 years Britain’s GDP would be 6.2 per cent smaller. The question is smaller than what? The claim is that, ceteris paribus, Britain out of the EU would be poorer than Britain in the EU, not poorer than Britain today.
If GDP grew at its historical trend rate of 2.5 per cent per annum then after 15 years Britain would be 44.8 per cent richer than today. If leaving the EU cost 6.2 per cent then Britain outside the EU would be 36.8 per cent richer.
That might be too optimistic. Growth as high as 2.5 per cent has been rare in recent years when austerity has held back the economy. Suppose that due to poor policy choices GDP growth averages only 1.5 per cent per annum. After 15 years GDP would be 25 per cent higher than today in the EU and 18.8 per cent outside.
Increase in GDP with good or bad policies, in or out of the EU
These figures should not be treated as a forecast or a projection. They are merely an illustration of the scale of the impact of leaving the EU setting it in perspective with other developments in the economy.
What can we conclude? Firstly, it would be better to stay in the EU, which follows from accepting the Treasury analysis. Secondly we see that other economic policy choices can have a bigger impact on our future wellbeing than the decisions on Britain’s future trading relationship with the EU.
The conservative leavers have their idea of those other policy choices. They favour further deregulation and cut to corporate taxes to lower business costs. However this approach leads to a low wage low productivity environment where insufficient demand and deflation risks locking the country into a low growth trajectory.
The alternative lies in a virtuous cycle of investment, rising productivity and rising wages. Higher wages provides an incentive to productivity enhancing investment which in turn funds the rise in workers income.
An active industrial policy accompanied by public investment is needed to drive this process. Leaving the EU could start a rebalancing away from the financial sector but active policies will be needed to support an expanding manufacturing sector in its place. Industrial policy needs to promote manufacturing exports to take advantage of the fall in sterling. A low pound is necessary to address the current account deficit, but without active measures the opportunity may be missed
Cross border supply chains will face new frictions and industrial policy should aim to help firms to create shorter supply chains without compromising quality.
With inflation is still one below the government’s target, rising wages could help steer away from the danger area of deflation. Only when inflation is significantly above target will it be safe to raise interest rates which will have the benefit of increasing returns to savings.
Despite the media focus on the economic impact of leaving the EU, that is not the main determinant of future prosperity. The disruption of leaving will weigh on the economy for some time and the loss of efficiency will have permanent effects. Nevertheless there remain many important policy choices which will have greater influence on future economic outcomes.
We need to get back to the policy debates we were having before June.
Jos Gallacher represents Labour International on the National Policy Forum of the Labour Party
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