A balancing act

“Politicians have spent too much time arguing over relatively small differences in spending plans,” says the Director of Policy Exchange

A balancing act

This article is part of a special series on growth – where will it come from and what can be done to stimulate it?

“Once you starting thinking about economic growth,” said the great economist Robert Lucas, “it’s difficult to think about anything else.” What he meant was that for all the political bickering over who gets what, what really determines our opportunities and our quality of life is the steady growth of the economy.

Britain’s debate about growth has been depressingly short sighted. Politicians and journalists have obsessed about the next quarter’s growth figures and spent almost all their time arguing over relatively small differences in spending plans. We need to raise our sights and talk about the big things that will change Britain’s rate of growth over the longer run.

In some ways, policy in the UK is not that bad: labour market regulation is still much better than much of Europe. But there are real weaknesses and missed opportunities. Take planning law. Only 10% of the land in England is built on. But, compared to our competitors, it is much more difficult to get permission to build factories, houses and places to work. Office space is more expensive in Manchester than Manhattan. We need to overhaul the system, replacing central planning by local government with a much more liberal system. In general, developments should automatically be given permission unless a certain proportion of those nearby complain. This would reverse the onus of a system in which the default answer is typically “no”.

Better targeting means we won't waste money on those who don't need help, and don't leave those with problems to flounder

Britain had between five and six million people of working age unemployed all the way through the years of the debt-fuelled boom, from about 1997-2007. The UK’s benefits system doesn’t move people back into work quickly enough. Job centres need to be much better at identifying claimants’ problems. Better targeting means we won't waste money on those who don't need help, and don't leave those with problems to flounder. Evidence from Australia, the US and Canada suggests that workfare programmes can be effective in moving some groups of unemployed people back into work. There’s no reason why those without a record of national insurance contributions should be allowed to turn down less preferred job offers for the first sixth months of their claim.

The debate about growth often features vague calls for ‘deregulation’ or suggestions for reductions in red tape, which are politically impossible. But there are opportunities to deregulate. For example, climate change policy in the UK is a mess: a poorly thought through mass of overlapping policies, which make the cost of going green unnecessarily high. We could become greener much more cheaply if we cut back winner-picking policies and move towards a simple carbon price. With green policies set to raise electricity bills by a third by the end of the decade, growth will be hampered unless we improve our environmental policy.

The government also has masses of assets it should be getting more value out of, from social housing (worth £400 billion) to digital assets like the BBC archive (the value of which are unknown).

One big factor unbalancing the economy and holding back the private sector in the regions is the setting of national pay in the public sector – in other words, paying people the same amount whether they live in cheap or an expensive area. Such national pay bargaining obviously means shortages in some areas and waste in others. But it also plays a major role in unbalancing our economy. Paying people over the odds in the public sector inflates wages in the private sector, taking away the competitive advantage of less expensive regions, and making the private sector smaller than it should be. Over the longer term, this means slower growth. That's one reason why the Labour government started chipping away at it with reforms in health and education, like Foundation hospitals and Academy schools.

There: a host of different things we can do to improve the growth of the British economy. Many would be controversial, but the alternative is a decade of weak growth and high unemployment. And put like that, there isn’t much of a choice but to go for it.

Further reading

Neil O'Brien

Neil O'Brien is Director of the think tank Policy Exchange.

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