No, the Chancellor cannot just ‘unleash growth’

but it’s work enough just to avoid causing damage

In the wake of the recent Budget, I was asked the impossible question: what does this mean for UK growth? Has the Chancellor unveiled something that will boost Britain’s economic prospects?

Impossible, and quite reasonable. The question is the counterpart to the demand you see commentators make of Chancellors every Budget: where is his big plan for growth? How can the economy be expected to do all that growing if the man in charge doesn’t have a plan for it? I can provide loads of examples, but the absolute classic comes from The Economist in March 2013 (“A little faster, George?”) which said

Government borrowing costs are still low, because investors trust Mr Osborne, but Britain was downgraded because of worries about medium-term growth. Where can he find some?

Note the implication: he has to find some. Growth is a thing Chancellors look for and somehow devise in the small hours, with dedicated officials in the Treasury. Maybe they are helped by wise advisers at The Economist: the edition was stuffed with good ideas like a new NGDP remit for the Bank of England, and that hardy perennial, Do More Infrastructure. But the funny thing is the growth just happened anyway – as the ink was drying on the editorial, things started motoring a bit for the UK economy.

Chart 1: monthly growth 2008-2019

I was as highly amused by the editorial as they were irritated in the Treasury. But there was sense to it: we were coming out of a deep demand-side recession, and there was an urgent need to see businesses and consumers spending again.[1] GDP figures made us think we were in an actual recession in 2012 (they were later revised up, steeply). Ed Balls kept doing that “flat-lining” gesture, and the Guardian even unveiled a Triple Dip-Diplodocus cartoon.

Within days of the editorial, growth just returned. Maybe Funding for Lending did it. Maybe it was Mario Draghi bringing an end to the Euro crisis. Just as likely it was always going to happen.  The UK had a normal growth speed – about 2.0-2.5% per year – and absent horrible things happening, its economy was going to grow like that – adding workers to the workforce, capital to the workers, just trundling upwards.  

The Coalition period marked a high point for public arguments about how politicians ‘produce growth’, because of that demand-side slowdown and genuine differences about whether fiscal policy was to blame.  With demand-side arguments, you can expect to see the results quite quickly – within a couple of years, and certainly before the next election.  But – my first point – often these arguments labour under a delusion of control.  Most things happen regardless of any immediate action of the government. The media narrative demands that we assume agency for the state, and at some critical times that assumption is absolutely right – the failure to stop the vertiginous drop in NGDP growth in 2008, say, or Trichet’s disastrous tightening of policy in 2011.  But often stuff just happens.

Since ceding macro control to the Bank, the regular calls to “unleash growth” have generally meant supply-side measures: steps to improve our long-term potential. Which, until recently, is a very dull and unshifting variable. Here is another chart, this time taking the OBR’s Historical Forecast database and showing what the government’s average forecast of medium-term GDP growth has been since the 1980s.[2]

Chart 2: evolving average growth forecasts

It is easy to be drawn to the stories told by the wiggles in the line. There is the rapid drop from March 2008, as we went from assuming 2009 would be a 2.5% Up Year to learning it was a 5% Down Year. There is also that steadier subsidence upon the arrival of the Coalition in 2010, which saw the OBR replace years of predicted 3.5% bounce-back growth with something lower, which then got lowered again through all those demand-side hits (austerity, Greece, etc).

But on the supply side, what this chart shows me is a picture of stability – until recently. Once through any demand-side squall, until 2015 policymakers always foresaw years in that 2.0-2.5% range. This was regardless of whatever the government could announce, such as a giant programme like Funding for Lending, the rebirth of industrial strategy in 2012, a massive subsidy like Help to Buy, a big expansion of higher education, or a gazillion smaller ideas.

This brings me to my next point: it is very hard to shift that long-term supply-side picture. As I explain in my recent IFG blog, the OBR just never does it in response to Budget announcements. A priori, they are absolutely right to be so conservative.  In spending terms any Budget announcement is a shift of some small number of billions between the columns marked tax, spending and borrowing, or within categories of these. These shifts may be wise or foolish.  On average, they will be something in the middle. The economy, meanwhile, is a creature of £2,100bn in gross value added, over £10,000bn in wealth, vastly more in terms of actual transactions, sitting in a mesh of interlocking, intra- and inter-national exposures, determined by millions of different incomes, business plans, markets and prices.  Why should a 90-minute speech fiddling with small change divert it from its path?

At the macro level, what the Chancellor announces is usually a rounding error, and already factored in Bank of England calculations. Supply-wise, to change your mind on what the economy can produce, you need to change radically your assessment of some gigantic things: the stock of trillions in capital investment; the number and skill level of 31 million actual workers, or our scientific capability, a thing of accumulated quality generated from decades of investment, learning, international interaction and toil within universities, businesses and institutes.[3] 

Maybe you think you can transform the institutions, tax rates and ownership structure of a big chunk of the UK economy, like Margaret Thatcher did over a decade. Marginal income taxes dropping from 80 to 40%, massive utilities privatised, the Single Market created … and yet what can you see in the growth figures? If you are generous, perhaps a rise of half a percent or so, boosted by a clearly out-of-control boom in the late 1980s. 

Chart 3: UK growth outturns over 70 years

And if you are not so generous, and look through the cycle, and the result is flat:

Chart 4: UK growth outturns, 30 years

So what is my assessment for what any Budget does for our growth prospects? Absolutely nothing, of course! Hence my predictable irritation every time I read some tweet, column or think tank report demanding that the Chancellor do XXXX in order to Unleash Growth.  No, he can’t. That option is just not on the table.  Tot up the full impact of what you are proposing, O Think Tanker, and honestly I will challenge you if you think it is 0.1%.

Which is why I find the right-hand side of Chart 2 so deeply dispiriting, still – and the insouciance with which the Government sets aside concerns about the damage caused by the choice of too harsh an exit from the EU.  Up until 2016, all the big shifts in Chart 2 were caused by a big recession that then blew through – leaving significant scars, for sure, but not altering the OBR’s assessment that the UK can grow at 2.0%+ in the medium term.  And these courses were not chosen. Then over 2016-18, the OBR cut annual growth estimates by almost a full percentage point – more than all the positive growth story that the Thatcherites can lay claim to – and twice the effect of that pandemic. This is a big deal, and conscious policy!

Maybe, if you are an optimist, you hope that the OBR has got it badly wrong. More realistically, maybe you agree with Professor Vollrath that the long term trends are all very much downward anyway, and our choice of a much harsher relationship with Europe is a coincidental accompaniment. But even if you are sympathetic to that point, bear in mind that his excellent book is largely about the frontier economy, the United States, and there is no cast iron rule that the UK should be wilfully falling further behind it.

This brings me to my last point. Clearly, I don’t believe Chancellors can just announce extra growth, long term. I also think many of the short term fluctuations that determine whether they have a good Budget day are out of their control. But this is NOT a call for policy nihilism.  Good policy clearly matters! What I have learned is that governments of a developed country have to maintain excellent economic policy just to keep growth on track.  And, for anyone who thinks it can’t get worse, there is a one word answer: Italy.  Mess up your institutions enough, and there is a very long way you can fall. One last chart:

Chart 5: long term growth figures for France, UK and Italy

[1] Park, for now, the question of how much this austerity plan had caused the growth problem. Looking at the graph, it is clear that growth did fall from 2010, and the fierce noises and VAT rises emanating from HMT may have played a small part. But the economy also faced a rapidly slowing EU economy, a crisis that was not resolved till late 2012; the US debt-ceiling shenanigans; and oil prices ramping up after the Arab Spring.

[2] Compiled by the OBR, but only OBR forecasts from 2010. Generally including 5-6 years. Important not to take too seriously the gyrations in the early 1990s – largely determined by the removal of the bad years (1991, 1992) as the forecast moves forward.  Much of that recession was almost entirely revised away in the figures, amazingly

[3] Hence my somewhat scepticism when Stian reacted so forcefully to the downshift in R&D spend

Published by freethinkingeconomist

I'm a mid 40s, former special adviser (Downing Street 2017-19, BIS from 2010-14), former FT leader writer and Lex Columnist, former financial dealer (?) at IG, student of economic history, PPE like the rest of them, etc. This blog has large gaps for obvious reasons. The name is dumb - the CentreForum think tank blog was called Freethink, I adapted that, we are stuck now.

5 thoughts on “No, the Chancellor cannot just ‘unleash growth’

  1. “Park, for now, the question of how much this austerity plan had caused the growth problem. Looking at the graph, it is clear that growth did fall from 2010, and the fierce noises and VAT rises emanating from HMT may have played a small part. But the economy also faced a rapidly slowing EU economy, a crisis that was not resolved till late 2012; the US debt-ceiling shenanigans; and oil prices ramping up after the Arab Spring.”

    The Arab Spring was caused, in part, and not wholly, by cuts to fuel subsidies (which while a good policy overall, is pretty austere and not very popular while you’re doing it). The debt-ceiling farrago was because the GOP were trying to slash government spending and stymie the democrat’s social spending commitments. And the 2012 Eurocrisis was in part caused by austerity politics preventing a much needed rebalancing between Northern and southern Europe (and the ECB being dreadful). UK austerity was part of a general sea of growth damaging austerity, so I well continue to not “park, for now,” how bad Osborne’s tenure was. He was a leading austerity policy entrepreneur.

    Otherwise, I think a very good post! Even if you look at China, the key moment is less “embracing Deng” than “rejecting maoism.” Basically no better developmental policy than “stop doing maoism,” but sadly you have to be doing Maoism first for it to work.

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Economic advice. No longer special.

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