By Mohamed A El-ERIAN
As in many other developed countries lately, the two major political parties in the United Kingdom have embraced economic growth as their top policy priority.
Following the volatile 49-day experience of Liz Truss’s government and its “dash for growth” in 2022, however, both parties emphasize that there are no financial shortcuts.
The focus, instead, is on devising measures to boost productivity, resource allocation, and growth over the long term. In this respect, the opposition Labour Party is ahead of the ruling Conservatives, though both are still working out the details of actual implementation.
Buoyant, durable, sustainable, and inclusive growth is essential for a country where the older generations risk seeing their children end up worse off than they are.
That has not happened in many decades. Only growth can deliver the resources needed to enhance living standards, improve public services, support sustainable energy initiatives, limit the scale of generalized tax increases, and combat inequality of wealth, income, and opportunity.
In short, it is all about increasing the safe speed limit for economic growth. The Bank of England estimates the UK economy’s potential growth may be as low as 1%. At that speed, much that ails the country is likely to get worse, rather than better, over time.
Moreover, this already weak growth potential could deteriorate even further if the problem is left to fester.
There is no singular, silver-bullet initiative that can change this outlook. Many British politicians are still haunted by the Truss saga, when the newly arrived prime minister tried to use unfunded tax cuts as a stimulus, only to create a damaging episode of financial instability that forced a change in government.
It is now widely acknowledged that after so many years of insufficient investment and sagging productivity, achieving high-quality growth requires a comprehensive policy approach that builds on many intermediate objectives.
The Labour Party has gone further in specifying such structural reforms. Its program includes proposals to revamp the planning system, boost infrastructure, improve trade links, crowd in domestic and foreign private investment (including through an energized National Wealth Fund), remove tax distortions, and pursue sector-specific initiatives. The party has also identified promising public-private partnerships geared toward enhancing investible funds, while encouraging innovation and efficiency.
Labour has indicated that it would try to “hardwire” many of these reforms by strengthening existing institutions.
To ensure that all its policies remain compatible with financial stability, it has committed to adhere to the same public-debt “rule” as the current Conservative Party.
The challenge now is to devise a detailed execution plan, one that includes a high-frequency monitoring system to provide real-time feedback and allow for timely course corrections, if needed.
Any economic-policy roadmap must favor comprehensive over piecemeal reforms. Such reforms should be implemented simultaneously, rather than sequentially, and they should come sooner rather than later.
As Labour demonstrated with its successful take-off after coming to power in 1997, a new growth emphasis would benefit from serious credibility-enhancing steps. That is what then-Chancellor of the Exchequer Gordon Brown did with his surprising and insightful decision to hand over the reins of interest-rate policy to the BOE, thus enshrining the principle of central-bank independence.
One must hope that the current Labour leadership has not ruled out too much policy flexibility in its pursuit of a decisive election victory. Some of the most powerful measures that it is proposing would require resources up front, but their growth and financial benefits would materialize only over time. The next government also will find itself confronting a more complicated, increasingly fragmented international system; and it will need to secure consistent buy-in from the private sector, which ultimately must do most of the heavy lifting.
Another, related task is to improve the functioning of existing growth engines while also supporting the development of the sectors and industries that will drive growth in the future. Striking a proper balance may prove to be the most difficult part of the challenge, given the country’s resource constraints and the fact that some key initiatives are better pursued at a regional level. (With its lack of sufficient robust regional initiatives to drive innovation in artificial intelligence, life sciences, and sustainable energy, the European Union currently faces a similar problem.)
Promoting high, durable, sustainable, and inclusive growth was never going to be easy after so many years of neglect. The need to revamp the UK’s existing growth engines and simultaneously kick-start new ones makes the task even more complicated. But to paraphrase US President John F. Kennedy’s famous moonshot speech, the winning party must do these and “other things, not because they are easy, but because they are hard.”
Mohamed A. El-Erian, President of Queens’ College at the University of Cambridge, is a professor at the Wharton School of the University of Pennsylvania and the author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse (Random House, 2016) and a co-author (with Gordon Brown, Michael Spence, and Reid Lidow) of Permacrisis: A Plan to Fix a Fractured World (Simon & Schuster, 2023).
Copyright: Project Syndicate, 2024.
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