PERSPECTIVE A Progressive Growth Strategy for the United Kingdom JONATHAN PORTES October 2013 The Macroeconomic Position The economic history of the United Kingdom over the past 30 years can be summarised as a period of fairly suc­cessful microeconomic reform, leading to relatively high productivity growth, interspersed with episodes of dis­astrous macroeconomic and financial mismanagement. Unfortunately, we are living through such an episode at present. Although growth has now returned this remains the slowest recovery in the United Kingdom’s recorded economic history. The National Institute of Economic and Social Research(NIESR) forecasts that real per capita gross domestic product, the simplest measure of how prosperous we are as a country, will not return to its 2008 for several more years. How did we get into this mess? The financial crisis of 2007–2009, and the ensuing Great Recession, was global. However, UK policymakers, especially those in power in the 1990s and 2000s, contributed as much as anyone to a prevailing philosophy that the only appropri­ate intervention in markets was to deal with specific, identified cases of market failure. When it came to financial markets, that approach proved to be wholly inadequate. The direct result was a combi­nation of perverse incentives, failures of corporate gov­ernance and unanticipated systemic risk in the financial sector that helped spark the crisis. Indirectly, it increased inequality at the top end of the income distribution(at the same time as, thanks to the introduction of the na­tional minimum wage and tax credits, it was falling at the bottom end for the first time in decades). And it meant that the United Kingdom was far too reliant on one vola­tile sector for both growth and tax revenues, which in turn left the public finances extremely vulnerable to a severe downturn in that sector. All this meant that the crisis hit the United Kingdom particularly hard. By contrast, the initial policy response in 2008–2009 – bank recapitalisation and fiscal stimulus – was relatively successful. Unfortunately, however, emergency bank re­capitalisation was not followed up by proper restructur­ing. And, in mid-2010, leading the way in the G20, the Coalition Government reversed course on fiscal policy in mid-2010, with the Prime Minister David Cameron describing the new approach as»fiscal conservatism and monetary activism«. This was justified by sustained at­tacks on those calling for a more balanced approach. The Prime Minister suggested that the»the only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off the credit card bills.« The Deputy Prime Minister claimed that the government will»wipe the slate clean of debt« for the sake of our children. While, fortunately, the reality has not been nearly as ex­treme as the rhetoric, as the government has by and large allowed the automatic stabilisers to operate, it is still the case that»fiscal conservatism« – described by the International Monetary Fund as a»large and front­loaded« fiscal consolidation plan – had a substantial and negative impact on growth. The halving of public sector net investment(a cut of more than 1.5 per cent of GDP), planned by the previous administration and implemented by this one is now almost universally recognised as a major policy error. But the impact of»monetary activism« is far less clear. Although the Bank of England did indeed expand its quantitative easing programme, this has become subject to diminishing marginal returns. Meanwhile, the finan­cial sector remains dysfunctional. It is manifestly failing