Leading economists are warning that the long-term, sustainable growth rate in the UK may be only 1% (compared with the 2.5% that HM Treasury thought standard from the 1980s to the 2000s). Until 2008 the UK had got used to our economy doubling in size every 25 years: unless action is taken it will now only double in size every 70 years.
GDP dropped 6.3% from its peak in 2008 and is still around 3% lower than that today, with average annual output growth from 2008 of -0.7%. This means that five years on from the financial crisis we have still only recovered half the loss to national income which occurred in the immediate aftermath. This is the worst and slowest recovery from a major economic shock in 170 years.
The research, Will flat-lining become normal?: An analysis of Britain’s worst period of peacetime growth since the industrial revolution (by economists Tim Congdon CBE, Joanna Davies, Haroon Fatih, Dr Andrew Lilico, Robert Sierra, Peter Warburton and Trevor Williams), shows that the poor recovery is due to a major productivity crisis. Therefore, further increases in aggregate demand won’t help the economy. The economists identify seven key reasons to be pessimistic about the UK’s growth rate over the long-term. They are:
· Increased government spending and taxation as a proportion of GDP. This factor alone has reduced the sustainable growth rate by around 0.5% – possibly more.
· Increased regulation of the energy and financial services sectors. These sectors contributed substantially to the productivity performance of the economy in earlier decades.
· The depletion of North Sea oil.
· The arithmetical effect of low-productivity immigrant workers being added to the working population.
· The huge growth in credit before the crisis, followed by its contraction since – partly driven by increased banking regulation. Easy access to cheap credit fostered the creation of excess capacity in the construction, real estate development, distributive and financial services sectors, for example. Not only was their growth rate unsustainable but their peak level of activity was also artificial. Post-slump, the viable economic size of these industries may remain below their prior peaks for an indefinite period.
· Increased government, corporate and household debt relative to GDP.
· Demographic pressures from an ageing population.
The instinctive desire to reclaim the economic heights of late-2007 or early-2008 may not be consistent with the return to a sustainable path of economic development. In these circumstances, another fiscal boost to aggregate demand, as some advocate, would deliver