Long-term thinking for the UK economy

Plane taking off at Heathrow Airport Will the government build any new runways in the South East?

Why do we spend so little time talking about what really matters?

That's the question I once again asked myself, reading the final report of the London School of Economics' Growth Commission.

Before you ask, I haven't just come back from a spiritual retreat, eager to talk about enlightenment and the meaning of life (I was in Davos, which - trust me - is not the same thing at all).

I'm still talking about economics here.

But reading and listening to the political debate about UK economic policy, you'd be forgiven for thinking that the most important economic decisions the government makes are all fiscal: Will they or won't they press ahead with Plan A, or Plan A-minus? How much, exactly, will it cut from welfare? And when?

Strategic failure

These are important short-term issues - especially if you're someone affected by one of those cuts. They might have some impact on the recovery. And, of course, they are exciting politically, with lots of opportunity for the main parties to lay into one another.

But if you ask business leaders, or most economists, which government decisions taken over the next few years will have the biggest long-term impact on our economic future, I'm not sure that Plan A versus Plan B would even make it to the top three.

Far more important, to them, would be the kind of long-term strategic choices highlighted in the LSE's report.

For example:

  • Will the government build any new runways in the South East - or come up with a better way of taking these big infrastructure decisions in the future?
  • Will planning reforms actually make it easier to expand businesses - or build the right kind of new housing?
  • Or will the financial system get better at channelling investment funds to growing firms?

To economists, all of these things probably matter more, to Britain's economic future, than the short-term debate between Plan A and Plan B.

That's because, one way or another, they all go to the Achilles heel of the UK economy: "A failure to achieve stable planning, strategic vision and a political consensus on the right policy framework to support growth".

Britain has many economic strengths, the LSE Report points out. But that consistently short-termist, confused approach to investment - in our physical capital and in our people - is holding us back.

The report gives Britain's politicians a good chunk of the blame for this strategic failure. But there is plenty more to go around.

Update 18:05

I've been speaking to one respected economist and policymaker who thinks I've forgotten one big way that short-term decisions on UK fiscal and monetary policy could affect the UK's long-term economic health. That is through their effect on youth unemployment.

According to the latest figures, there are 633,000 16-24 year olds out of work in the UK (excluding those in full-time education). That's an unemployment rate of 18%. About 28% of these young people have been looking for work for over a year.

As we know, the economy has been producing jobs, even though it has not been producing much growth. But young people have received less than their fair share of that extra work. The slower the recovery, the longer it may take for them to get their foot on the ladder.

As my economist friend points out, that's not just bad news for the people affected and their families. It's also bad for the country, long-term, because all the evidence suggests that individuals who have a period of unemployment at the start of their working life pay a heavy price for that bad luck. Their earning power is permanently affected and they are more likely to need financial support from government.

So, there is at least one way in which short-term decisions on macroeconomic policy by the Bank of England and the chancellor could be important for the long-term as well.

This doesn't really contradict what I was saying before. The LSE report highlights the great need to invest in our human capital, by improving our education system and investing in skills. But the authors of the report (and the secretary of state for work and pensions) would probably agree - one of the greatest investments that any government can make in its future workforce is to help get unemployed young people into work.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 46.

    The real issues need bringing together and this starts that process. No report can, at this time, highlight the REAL damage being done by this Governments obsession with hitting the poor hardest. A true balancing of the economy will take decades to achieve if demand is lost. More than 30 years of failed economic policy is to blame! Time for some fresh economic thinking!!

  • rate this

    Comment number 111.

    @ 107 Oblivion
    In your model, the turn over is high but the profits are zero. All that trading for nothing= zero earnings. Unless the suggestion here is that QE is just one pound note going backwards and forwards a few billion times!

  • rate this

    Comment number 123.

    I don't believe in unemployment I believe there are people who are not working for some other people at the moment who are engaged in the business of living. If the scripture cannot be broken how do you get around that ruin and loss?
    2Pe 2:3 And through greed shall they with false words make merchandise of you: whose judgment now of a long time lingereth not, and their damnation slumbereth not.

  • rate this

    Comment number 136.

    132. Well it's not really your theory but certainly if you let markets adjust quickly & nec adjustments to take place then you can start the rebuild all the quicker. Certainly nutty idea's like Cable's business bank are more likely to create further distortions & misallocation of capital.

  • rate this

    Comment number 164.

    "#158 the debt mountain was create by labour party "

    Reality check: you had the highest standard of living ever under Labour, with close to FULL EMPLOYMENT, and they left an Economy GROWING. It is your beloved extreme right wing Govt's ideology agenda that is borrowing more for FAILURE, and piling on the DEBT in only 33 months in Office.


Comments 5 of 260



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