Chancellor Sajid Javid has declared his ambition to restore Britain’s economy to its postwar glory days.
He told the Financial Times in an interview last week that he wanted to boost economic growth rates to around 2.7 to 2.8 per cent — the level they averaged from 1945 up to the global financial crisis.
It is a startling goal. UK gross domestic product has grown faster than 2.5 per cent in just one year since the 2008 crisis. Economists’ average forecast is for GDP growth of only 1.1 per cent in 2020.
The UK is not alone: slow growth has set in across the developed world, with the IMF’s latest forecasts predicting output growth stabilising at 1.6 per cent across advanced economies in 2020.
The big question is how much higher Mr Javid can realistically aim — even if the government manages to avoid an economically damaging agreement on the UK’s long-term trading relationship with the EU by prime minister Boris Johnson’s self-imposed deadline of December 31.
The Bank of England believes Britain’s potential growth rate — the “speed limit” at which the economy can grow sustainably without excess inflation — will at best reach 1.5 per cent in the next few years.
Economists said that while there was scope to improve this, Mr Javid’s goal to return long-run growth to pre-crisis levels was at odds with the realities facing almost all developed economies — ageing populations that will limit expansion of the labour force along with chronically weak growth in productivity.
“Trends around the world don’t support the growth rates we saw in the golden age of capitalism any more,” said Carys Roberts, economist at the think-tank IPPR, who described Mr Javid’s GDP goal as “a fantasy . . . largely because of factors outside government’s control”.
The economy’s potential growth rate is determined by two things: the quantity of labour available and its productivity — the amount of output that workers can produce.
Over the past decade, the UK has stood out among developed economies for the strength of its labour market, with the employment rate rising, more people deciding to work, and many of them toiling longer hours to offset the post-crisis squeeze on pay. Net migration has bolstered the size of the labour force, and a later retirement age has offset some of the effects of an ageing population.
But the flip side of high employment has been abysmal productivity growth and weak business investment — both exacerbated by ongoing Brexit uncertainties.
Even in the current tight labour market, there may still be scope to bring more people into work, or into better jobs.
Silvana Tenreyro, an external member of the BoE’s monetary policy committee, said this month that provided the government took action to boost skills, public health and workers’ bargaining power, it was “very hard for me to think this is the peak [in outcomes for workers], given the large segment of the labour market that has insecure jobs, uncertain hours, irregular hours . . . and where in-work poverty remains a big issue”.
But Paul Dales, economist at the consultancy Capital Economics, said that with the government apparently setting a more restrictive migration policy after Brexit, and demographic pressures increasing, the gains from increased labour supply would inevitably tail off.
This means that Mr Javid will only be able to achieve his GDP goal if he engineers a transformation in the UK’s dismal performance on productivity growth — raising it from near zero now to its pre-crisis average of above 2 per cent per year.
Mr Javid’s plans to step up public-sector investment in infrastructure in underperforming regions, and to focus on skills, may well help — in the longer term.
“He is doing the right thing investing in infrastructure and in regional economies that have been held back,” said Ms Roberts, but she added that such investment would take time to feed through, while the private sector would be cautious about capital spending ahead of the looming December 31 deadline on UK-EU trade talks.
“There is nothing that is going to give you a quick win, especially on an electoral cycle,” said Philip Shaw, economist at Investec.
He added that while narrowing regional divides might be the right priority, it was not necessarily consistent with Mr Javid’s stated GDP goal, because diverting cash from more productive areas could reduce productivity growth at the national level.
Arno Hantzsche, economist at the think-tank the National Institute for Economic and Social Research, said there was a risk — with the economy already operating close to capacity — that public spending might simply crowd out private-sector investment.
But the overarching issue is that no policy Mr Javid can devise is likely to help the UK overcome the challenge on productivity that is defeating almost every major economy in the world.
“He is asking for a huge step change in productivity that no country in the developed world is anywhere near,” said Mr Dales, adding that Mr Javid might “get lucky” if global productivity growth finally picked up on his watch as the benefits of the digital revolution began to feed through.
Kallum Pickering, economist at Berenberg, said: “To say that we will set policy in this country to cure ourselves of this problem all the advanced world suffers from is ambitious — to put it mildly.”
He expressed fears that Mr Javid might be tempted to engineer an unsustainable short-term boost to GDP growth in order to hit his goal as the next election approaches.