Politicians of all parties say they will deliver economic growth. What if that isn’t possible anymore?

October 6, 2022  

Adam Lent argues that in an era of repeated crises, Chancellors will ultimately have to focus more on delivering resilience than growth.

There is one thing Keir Starmer and Liz Truss agree strongly on: the UK economy needs to grow. The Labour Leader wants to focus on “growth, growth, growth”. His words were echoed by Liz Truss, who says her mini-budget is all about doing whatever it takes to push GDP up. They may be at odds about how to get there but the consensus on the goal is unquestioned.

The problem is, it’s not clear that sustained growth is still possible.

The history of recent times has not been one of normal economic functioning. In the last twelve years we have endured the biggest financial crash in 80 years, a global pandemic, spiralling price rises, and an energy crisis. These have required unprecedented interventions by governments and central banks to prevent the global economy collapsing.

Economists call these events “exogenous shocks” – unpredictable external occurrences that disrupt economies and make growth either impossible or much harder. Unfortunately, there  seems to have been rather a lot of very big exogenous shocks in recent years. Maybe this is just terrible luck but there are good reasons to think more profound processes are in play.

sustaining decent growth over any reasonable length of time will be very hard before a new crisis intervenes.

A fundamental shift in the global economy

Economic historians, Robert J Gordon and Helen Thompson, argue something fundamental has shifted in the global economy over the last fifty years that has led to this era of repeated crises. For Gordon it is the inevitable decline of the stellar productivity rises associated with the new technologies of the last century. Thompson identifies the increasing price and competition for oil and its many complex implications since the 1970s.

However, the biggest long-term drag on growth of all is the best evidenced: an increasingly hostile natural world. The modelling agrees that even if we limit global warming to 1.5 degrees celsius above pre-industrial temperatures, the global economy will contract by around 5%. If we fail in this effort, we could be looking at anything up to a 25% contraction over the next seven or eight decades – that would exceed the Great Depression of the 1930s by around 8%.

As politicians and the public begin to accept the reality of this new world, Chancellors writing budgets will have to recalibrate.

This may all sound like a problem for the future but this is far from the case. The impact of environmental degradation on regional economies is already very real. And then there is Covid – a deeply damaging economic event that scientists agree was part of an intensification of pandemics caused by the extensive destruction of animal habitats.

None of this is to say that there won’t be periods of growth but rather that sustaining decent growth over any reasonable length of time will be very hard before a new crisis intervenes. The UK is a case in point. Since 2008, the UK has only managed five years in which growth was over 2% before the pandemic shrunk the economy by 9.3%. The economy grew rapidly after lockdown ended but barely enough to erase the losses of 2020. And now it seems likely that there will be further contraction in 2023 resulting from the cost of living crisis. And it would be a brave person who forecast that no more exogenous shocks are on the way shortly: another pandemic, a major global drought, further conflict in Eastern Europe, intensified conflict in the South China Sea or the Middle East, turmoil on the financial markets. Any of these seem well within the bounds of possibility.

The need for resilience

As politicians and the public begin to accept the reality of this new world, Chancellors writing budgets will have to recalibrate. The dreams of a new era of sustained, multi-year growth for Britain driven by innovation, investment and entrepreneurship will be dialled down. Instead economic policy will become as much about creating resilience as growth.

Working out what that means in practice is a policy task that we have yet to turn their attention to seriously.

But I suspect that significant investment (rather than endless cuts) in the public services that have proved so important in recent crises will rise up the agenda. There will be a stronger focus on creating greater self-sufficiency and equality within local and national economies rather than always seeking to position Britain as a global competitor. And the effort to improve what might be called ‘social living standards’ – the fulfilment we gain from being active members of our various communities – will become just as important to policy-makers as driving up material living standards.

None of this will happen overnight of course. Westminster clings to its old ideas with grim determination. Even shocks as great as the 2008 Crash and the Covid pandemic did not significantly shift mindsets. But at some point the sunlit uplands rhetoric will ring so hollow that politicians will be forced to offer something realistic. At that point, a more relevant debate about what Chancellors should be trying to achieve on their big day can begin.

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