Politicians and voters must learn that every policy has a cost and an impact on growth

The runners and riders battling for leadership of the Conservative Party are setting out their stalls. Tax, lockdown, defence and Brexit are all key issues which have been raised. On some of these, at least, there are marked differences between the candidates.

But there is an elephant in the room: how to raise the underlying rate of economic growth in the UK. In the immediate short-term there may well be a recession. Some economists are suggesting it could be severe, with the worst squeeze on living standards for decades. Any serious politician should focus on this.

Yet the real issue goes much deeper. It’s not so much a question of how much growth – or lack of it – we can expect over the next year or two. It’s about how much there will be over the next decade and beyond.

The Office for Budget Responsibility published last week a closely argued document entitled “Fiscal risks and sustainability”. They highlighted three major areas where demographic changes will put increasing pressure on the public finances. An ageing population means increasing demand for health, pensions and social care.

The OBR projected that in 50 years’ time these would lead the ratio of public sector debt to GDP to exceed 250 per cent. As a benchmark, the current ratio, even after the massive splash of cash on Covid-19, is just over 90 per cent.

These problems don’t really kick in until the late 2030s, but the basic issue stays the same. How can we afford the increasing demands of the electorate?

The only way of doing it is higher economic growth.

Higher spending can always be paid for in the short term by issuing debt. That is, until the terrifying moment when the markets decide that enough is enough.

As a broad rule of thumb, each additional 1 per cent on the level of GDP yields an additional £10bn in tax receipts. An increase of 1 per cent in the growth rate would generate almost £100bn over the course of a decade.

Unfortunately, across the West as a whole, the underlying long term rate of growth has not been rising. It has been going into reverse.

Inspired by the late Angus Maddison, economic historians have put a lot of effort into constructing historical estimates of GDP. Maddison himself began by estimating the size of the economy in each of the 17 countries which he considered to be properly industrialised in 1870.

Over the pre-pandemic decade – from 2010 to 2019 – the average annual growth rate of real GDP was lower in all 17 economies than their long term average over the 1870-2019 period as a whole. Some were very much lower, with the 150 year average in Italy being 2.4 per cent compared to the barely perceptible 0.3 per cent of 2010-2019.

The most challenging and important task when it comes to political economy is how to get growth back to the rates which it sustained for well over a century. Without it, much of what is written in manifestos – whether of would-be Tory leaders or of opposition parties – does not have much meaning.

Everything on the wish lists of both politicians and the electorate has to be paid for. Tax cuts, more money for the armed forces, better social care – whatever the policy, it costs money. And without sound growth, there will simply not be enough of it.

As published in City AM Wednesday 13th July 2022
Paul Ormerod
Image:Flickr

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ALEX O’BYRNE

Associate

e: aobyrne@volterra.co.uk
t: +44 020 8878 6333

Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.

ELLIE EVANS

Senior Partner

e: eevans@volterra.co.uk
t: +44 020 8878 6333

Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.