The UK economy is growing at a relatively fast rate at present. The first estimate of GDP growth in 2014 is that the economy expanded 2.6 per cent. Recent survey data suggest the rate of expansion increased across the economy last month. Lower fuel and food costs are boosting the income households have available to use elsewhere. However, GDP remains well below where the pre-recession trend rate would have put it and the same is the case for productivity. Labour this week brought together its business policies in a new document, A Better Plan for Britain’s Prosperity, launched by Ed Miliband. It offers a good basis for the beginning of a Labour government and should be seen as the foundation for even more action to improve the UK economy.
The five years of this coalition government have been largely wasted as far as promoting long-term prosperity is concerned. This is deplorable. The drop in activity following the 2010 general election was not primarily because Greece was beginning to have problems (a sense of déjà vu could be forgiven today as we approach the next election). Problems in Greece were used politically to promote a smaller state ideology and this combined helpfully with a loss of nerve in our economic institutions. So it was that the new government announced the UK had joined the cult of austerity. To signal the change, the prime minister, deputy prime minister, chancellor, and other members of the government felt it necessary to talk down the condition of the UK economy. In doing so, the sense of crisis was increased. That may have been very clever politically, but it dented confidence in the economy, stalling investment and growth.
The drop in the oil price will be equivalent to an income tax cut for many households, with the inflation rate now at 0.3 per cent but average wage growth just under two per cent. However, this is a one-off gain which could reverse if global demand for oil increases. As the Office for Budget Responsibility noted last year, the only sustainable way to improve living standards is to raise productivity. That leads to wage increases and the higher growth rate should also help control government borrowing. The flipside of the increase in jobs has been that they have been concentrated in lower-paid work and probably hide underemployment of those self-employed. Only in the last couple of years has the economy properly picked up, but the coalition plans require households to increase borrowing to higher levels than before the financial crisis. In other words, Conservative party policy is more of the same, but with a much smaller state. At some point, a limit to growth will be reached. Clearly, an alternative approach is required. But that cannot be a return to the industrial strategies of the past, where government clumsily intervened, usually in a panic.
Labour’s A Better Plan for Britain’s Prosperity is a comprehensive document with useful analysis behind the plans to raise productivity. It is good to see there some of the policies I called for in The Credibility Deficit in 2011, notably a clear plan to control public finances, affirmation of a jobs guarantee, a national investment bank to help small businesses, new policies on training, reform of executive remuneration schemes, and some stability in the corporate tax regime. As we campaign on the economy in the run-up to the election it is vital to remember that business is not simply a means to the end of providing more jobs and obtaining more tax revenues for government to spend on the things it really wants to focus on, important though those aims may be. Rather, business when done well is a natural extension of our human creativity which can benefit us all. A key role of a Labour government should be to make the UK an exciting place in which to invest and work. The policy package launched this week was a significant move in that direction.
This article was first published by Progress on 18 February 2015.