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    This article is an excerpt from the CPS Growth Bulletin, authored by Ryan Bourne and Tim Knox. To read the full article, click here. To sign up for our mailings, use the form on the left of our newsletter page.

    Westminster has gone quiet in the past week as Members of Parliament and their staff exited stage left for recess. But there was understandably lots of focus on yesterday’s preliminary GDP numbers for Q2 2013, which showed that the UK economic recovery appears to be picking up – real GDP growth was up 0.6% on the previous quarter (in American terms, that’s an annualised growth rate of 2.4%). This, of course, is a welcome development. Yet it should come with all the usual caveats. These preliminary GDP figures will be revised, GDP should be regarded as a longer-term measure of economic health and short-term GDP does not show the sustainability of growth. Nevertheless, coupled with more promising survey data and the fact that all three of the major sectoral components (production, services, construction) saw growth, one shouldn't read this as anything other than good news. It would be particularly churlish for the opposition to claim this was ‘the wrong type of growth’ when their key policy plank has been yet more government borrowing to increase demand.

    We do share many of the concerns outlined by Allister Heath, though, about the medium-term health of the economy, which is still being propped up by huge amounts of government borrowing and low interest rates. The Chart above shows the path of UK real GDP. It’s clearly visible that this recovery growth is on a much lower trend trajectory than the unsustainable pre-crisis boom. Growth ultimately comes from innovation and the subsequent productivity gains brought about by investments and entrepreneurial activity. Putting aside so-called ‘stabilisation’ policy for a minute, then, what we really need to think about is how conditions can be set to raise the productive growth rate of the economy. There’s plenty of supply-side work where the government could be going much further to achieve this: whether through pro-growth tax reform, speeding up the liberalisation of planning laws, introducing more market mechanisms to improve productivity and efficiency in the public sector and acting much quicker to give the green light on key infrastructure and energy projects like airport expansion and shale gas.
    As a nation we are still consuming and borrowing too much relative to our saving and production. The CPS has been advocating means of trying to generate more of a long-term savings culture through Michael Johnson’s work (see here and here). But at the moment we are borrowing in order to purchase goods from overseas and promising to pay for them with exports in the future. 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.

    US-UK selective comparisons from the Shadow Chancellor
    Talking of prosperity, the Shadow Chancellor Ed Balls is currently out in the US to launch an “inclusive prosperity” commission alongside former Treasury Secretary Larry Summers (who is a front-runner to replace Ben Bernanke as chairman of the Federal Reserve). Balls usedan article in Monday’s Guardian to highlight the achievements of President Obama’s economic policies, lavishing praise on the economic stimulus the President undertook and providing a clear ‘natural experiment’ narrative – contrasting the economic fortunes in GDP terms of the US and the UK as a contest of “stimulus versus austerity”.
    Of course, in reality there are a range of other factors which distinguish the two countries, aside from fiscal policy. The US has always had stronger supply-side credentials, is benefiting from cheap energy provided by shale gas, and is less dependent in relative exporting terms to the downside effects of the Eurozone crisis. It has also been much more effective in getting on with private sector deleveraging. Balls also ignores consideration of the composition of fiscal consolidation (the UK’s initial consolidation was actually tax rises and capital expenditure cuts inherited from Labour). Yet it was bizarre, given that Balls’ whole article was about job creation and ‘inclusive’ prosperity, that he failed to mention President Obama’s jobs market record.
    As Ryan Bourne outlined in his City AM piece, although the US headline unemployment rate is at 7.6% (compared to our 7.8%), this does not tell the full story of its poor relative performance.

    According to Keith Hall, who was in charge of Washington’s Bureau of Labor Statistics (BLS) between 2008 and last year, the true US unemployment figure is actually about 3 percentage points higher than the BLS number. Many people in the US have just given up looking for work and so are no longer counted as unemployed. In 2007, the labour force participation ratio in the US fluctuated around 66 per cent. It has since fallen to around 63.5 per cent (a gap of around 6m people). In fact, prior to the last two months, this figure continued falling even after the recession had ended. The UK labour force participation rate has remained, in contrast, unchanged at the lower level of around 63.4 per cent. This can be seen in the chart below.

    This relative decline in the performance of the US jobs market can also be seen when examining the employment rate:

    Now, none of this is to say that the US is doing worse than us in absolute terms. Their GDP growth performance has been much stronger than ours and their jobs market is very similar to ours. But, given that Ed Balls is extolling the President’s economic record in the context of jobs, it’s surely wrong to ignore the fact that the US jobs market has seen a very large structural decline in the employment rate since the financial crisis. Is this due to Obama’s policies on, for example, welfare availability, or because of other economic headwinds? Either way, this relative decline suggests Balls’ simplistic US vs. UK narrative is somewhat misguided.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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