The statisticians will be arguing about the last quarter’s growth figures for years. Was it really a 0.7 per cent fall in national income, a 0.9 per cent fall or a 0.5 per cent fall? If it were not for the soggy weather and extra Bank Holidays, might we have managed just a 0.2 per cent fall? These issues are, by and large, irrelevant. The big question is whether stagnation has become the new normal. My fear is that it has.
Ironically, on the face of it, we seem to have a well-functioning labour market. The private sector is creating jobs faster than the public sector is shedding them. Also, real wages are falling so we are not falling into the trap that Keynes described of rigid wages preventing economic adjustment.
But the labour market is responding well to a dire situation. Real wages are falling because productivity is falling. Falling productivity plus stable employment equals economic stagnation.
We cannot get out of this position by deficit financing or more government spending. The government is already borrowing over 8 per cent of national income. There is no hole in “aggregate demand” caused by a lack of government borrowing. The government is also already spending around 50 per cent of national income.
And this is the first part of the growth puzzle. Evidence suggests that a ten per cent increase in government spending as a proportion of national income reduces the growth rate by about 1 per cent per annum. If we could add 1 per cent to the growth rates we have been achieving recently, there would have been a quite different growth trajectory – though not transformational. We need to look further.
This article originally appeared in City AM. Continue reading here.