For a growth revolution, we need a policy revolution

It is only by reducing the deficit and cutting taxes to stimulate the private sector that we will see any meaningful and long-lasting economic growth

Vital industries such as construction are still seeing negative growth
Stephanie Lis
On 26 October 2012 11:37

At a glance, yesterday’s growth figures make for encouraging reading. If one is to dig deeper, however, the green shoots of recovery seem more distant than one may hope.

Although a percentage point of growth in one quarter is promising, it is worth remembering that GDP in volume terms is exactly the same when compared with Q3 in 2011. The economy is now flatlining slowly upwards rather than flatlining slightly downwards. It’s welcome, but it’s not significant.

Moreover, the difficulties faced by the British economy are not fully reflected in today’s figures. Living standards are falling and productivity growth is weak. Although we may be leaving recession, it seems we are entering a period of unspectacular recovery, which is quite different from the economic recoveries of previous recessions.

The UK is in the midst of a long-term growth problem which is utterly irresolvable unless government spending and taxation are brought under control.

Spending has risen by 1.4 percent this year in real terms, demonstrating the marginal impact of austerity measures to date. We have seen just a small number of the cuts outlined by George Osborne in his Comprehensive Spending Review implemented. Regulation continues to throttle the economy, whilst high marginal tax rates are disincentivising people from working, saving, and investing.

0.4 percent of Q3’s growth has come from the public sector, a figure which is not encouraging for long-term growth. Economic recovery will not come from public spending, which has spiraled dangerously out of control. The government is spending 50 percent of our national income, up from 40 percent just seven years ago. Most economists will agree that an increase in spending of 10 percent of national income will reduce underlying economic growth by 1 percent per annum.

With a budget deficit larger than that of Greece, a reduction in public spending is essential if the government wants to achieve sustainable and continuing economic growth.

There are many ways in which the government can promote growth whilst cutting spending. Focusing on increasing private sector investment and productivity is the key. Crucial areas such as construction are still seeing negative growth, with output decreasing 2.5 percent in the last quarter as a result of the heavy regulation and high taxes that deter investment and create uncertainty. Rather than raising various taxes, the coalition needs to create the space for major tax cuts. Deregulation measures such as planning liberalisation would be a massive boost for industries such as construction.

Uncertainty facing businesses could also be tackled by improving labour market flexibility. This, along with a reduction in marginal tax rates, would lead to the increase in productivity which is so vital for sustained economic growth.

Hopefully the Coalition will wake up to the fact that spending cuts, although painful at times, are the answer to the mess which our economy is in. Focusing on raising taxes as they have so far is a flawed strategy. It is only by reducing the deficit and cutting taxes to stimulate the private sector that we will see any meaningful and long-lasting economic growth. To have a growth revolution we need a policy revolution.

Stephanie Lis is Communications Officer at the Institute of Economic Affairs

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