The UK – and Europe – urgently need a growth strategy
European Heads of Government begin their two day summit in Brussels today, dominated by the crisis in Greece and its effect on the future of the eurozone. But I hope some time is spent thinking about sustaining economic growth across the Channel. Today’s FT reports what it calls a “sharp loss of momentum” in eurozone economic growth, with economic activity contracting outside France and Germany for the first time since 2009.
Meanwhile, the TUC has been responding to the European Council’s recommendation on the National Reform Programme of the United Kingdom. After the March 2011 European Council, European Member States introduced national stability and national reform plans. On 7th June, the European Commission published country specific recommendations in reaction to these plans. Sadly, when it comes to their recommendations for the UK, the Commission falls into the same trap as the Coalition Government. While speaking the language of growth, it supports spending cuts that are sharp enough to undermine any real prospect of growth taking place.
The European Commission forecasts “moderate growth driven by corporate investment and an exchange rate driven rebound in net exports” in the UK. I guess it all depends how you define “moderate growth”. Over the last quarter of 2010 and the first quarter of 2011, UK growth was flat. Growth was -0.5 per cent in 2010Q4 and +0.5% in 2011Q1. As Tony Dolphin, Senior Economist at the IPPR think tank put it in April, “the UK has just come as close as it is possible to come to a recession without actually being in one”. What is more, forecasters continue to revise down growth estimates. The National Institute for Economic and Social Research (NIESR), for example, forecast in May that growth this year would be just 1.4 per cent, 2.0 per cent next year and below its trend rate of 2.1 per cent in 2012.
Still more damning is that NIESR predict the weak recovery will lead through to lower tax revenues, with higher public sector net borrowing and a higher budget deficit in 2015-16 than projected by the UK’s independent Office for Budget Responsibility. NIESR say: “We do not expect the government to meet its target to balance the cyclically adjusted current budget by 2015-16”. So for all its macho talk, the government’s economic policy is leaving the recovery so weak that its ultimate aim, to cut the deficit, is likely to be missed. The medicine is killing the patient.
When not talking about the deficit, the European Commission’s recommendations for the UK raise some important issues. They are right to highlight the UK’s historically low rates of public infrastructure investments, particularly regards transport, which impede growth. They are also right to raise UK weaknesses in intermediate skills, the number of British children living in jobless households (even though this number is less now than it was a decade ago), problems of credit availability, especially among SMEs, and the scourge of youth unemployment. One of their recommendations, for a comprehensive strategy to reduce early school leaving, is well argued, but will not be helped by the Coalition’s abolition of the Educational Maintenance Allowance.
But we simply cannot invest in growth in the way that we need when we are trying to cut the deficit so far and so fast. And for the UK, read the rest of Europe as well.