GDP figures: It’s not just about growth per se but the type of growth

A return to growth is by itself not sufficient; of equal concern is the type of growth the economy is generating.

 

There is a strong possibility that economic data released by the Office of National Statistics this week will reveal the UK economy returned to growth in the third quarter, bringing to an end the double-dip recession.

The data is likely to be met with relief, vindication to those who have argued for months that the underlying signals in the real economy have been more positive than data from the ONS has claimed.

However, a return to growth is by itself not sufficient; of equal concern is the type of growth the economy is generating.

Wage growth for the majority of earners in the UK stalled around 2004, a full three years before the recession began. This hints at some much deeper problems and it has already been predicted a return to growth without fundamental changes in the economy will simply repeat this unsustainable situation.

Before examining these deeper issues we must ask whether we can achieve even a modest and sustainable level of growth in the short term. A recent report by the IMF suggests every pound of austerity is actually removing between two and three times more out of the economy than the originally estimated. Growth – and thus public borrowing – forecasts may therefore have been predicated on erroneous calculations.

In light of this it is entirely possible the government will have to find further cuts on top of the additional cuts already announced.  This risks pushing austerity toward the tipping point where it becomes self defeating, reducing economic output by more than the reduction in spending itself.

The government’s growth forecasts may also be susceptible to a perfect storm of factors dampening consumer spending into 2013. Food inflation is expected to reach record levels; energy and fuel prices are both on a one-way upward trajectory in the long-term; and the labour market remains difficult.

Despite a recent fall in unemployment, wage growth continues to lag behind inflation and under-employment, which may yet prove unsustainable, remains a problem.

For an economy largely reliant on consumer spending this is worrying news.

The housing market, a major driver of consumer spending, remains depressed and some estimates predict real-term prices won’t return to pre-crash levels until 2024. British banks are still in a parlous condition and unable to offer cheap credit to give the economy a boost; changes in the regulatory environment suggest they will struggle to do so again in the future.

This is the heart of the issue – much of the growth before and after 2004 was fuelled by an unsustainable housing and consumer credit boom that left households with record levels of personal debt as wages stagnated. Businesses sought short-term profits, reducing the share of GDP going into wages, increasing individuals’ reliance on credit to maintain living standards. The second question is therefore how we encourage a more sustainable type of growth.

The government has repeatedly talked of rebalancing the economy away from an over-reliance on finance and consumer spending, but there is worrying evidence they have not gone nearly far enough.

The Resolution Foundation and Institute for Fiscal Studies argue a return to growth of 2.3% per annum will result in those in the bottom half of the income distribution experiencing a fall in living standards. By their own admission, that growth forecast (based on OBR figures) is incredibly optimistic.

A fall in living standards for half the population still trying to pay down household debt will do little to boost consumer spending. Similarly it may lead to an increase in demand for in-work benefits as a means of redistributing the proceeds of growth; a difficult demand on a government seeking to reduce the welfare budget and meet the needs of an ageing population.

To offer a small glimmer of hope the RF and IFS research suggests investment in skills, better wages for the low paid and changes to the economy’s employment structure could lead to a much more sustainable and equitable sharing of growth across the income distribution. This is positive news, but achieving this is likely to be challenging.

Many have speculated the coalition government’s fortunes are tied to a simple return to growth – but they are actually tied to the type of growth they encourage. Modest growth based on a largely unreformed economy that delivers falling living standards for half of the population and increasing inequality does not make for a winning electoral formula.

Encouraging a more sustainable type of growth will require some very difficult choices for governments and the electorate. Thus the question of what type of growth we are going to experience is in many ways the big question in UK politics; a question of which party has the vision, policies and conviction to bring the new economy to life.

4 Responses to “GDP figures: It’s not just about growth per se but the type of growth”

  1. LB

    The second question is therefore how we encourage a more sustainable type of growth

    ===============

    You’re missing the basic point.

    Can growth solve the government debt problem?

    The answer is no. Debts of 7,000 bn on taxes of 570 bn can’t be solved by growth.

    Next, what do you mean by growth?

    You don’t mean growth in the economy. You really mean growth in taxes. More money taken from people is what you really mean. Why not be open and say you’re solution is to take more money from hard working people?

    Ah yes, you wouldn’t be elected so you have to keep it a secret what you mean by growth, and what the debt is.

    Now, 150 bn a year deficit. Lets say you get a million back to work. That ‘growth’ works if you are paying the million 150 bn / 1 million or 150,000 pounds a year. Now we know in a few cases you were, but they aren’t going to make that much of a difference.

    So you’re deluded.

  2. Brian S.

    This is left-wing blogging? “In light of this it is entirely possible the government will have to
    find further cuts on top of the additional cuts already announced. This
    risks pushing austerity toward the tipping point where it becomes self defeating, reducing economic output by more than the reduction in spending itself.”
    Austerity by definition is already self-defeating, it’s reduction in government spending, that reduces the amount of money in the economy and hence GDP. It can never make the ecomomy grow, but it can reduce public services to the point of destruction.The government never has to ‘find further cuts’ to reduce the defecit. Lack of UK government spending is always a political decision, not one due to lack of ‘money’.
    Your last paragraph is rubbish – it’s not a question of ‘vision, policies and conviction’ it’s down to who can spin the best narrative in the public arena. Agitprop. The Coalition has convinced you at least that defecits matter more than anything and Austerity is a Good Thing. Your job as left-wing bloggers is to convine the public of the opposite – get on with it.

  3. Newsbot9

    As usual, you are claiming that only shrinking the economy and only spending on corporate welfare is the answer. Gotta keep you and your buddies in luxury, screw the rest!

    You keep calling anyone who wants you to pay tax deluded!

  4. Newsbot9

    Do try not to present contradictory views in the same post.

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