John Singleton: Don’t expect action when politics and economics are mixed

But whether the UK economy grows by 0.3 per cent – or 
shrinks by 0.3 per cent a quarter – has little economic significance, whatever its impact on the political circus.

Either way, the performance of the British economy over the past few years has been appalling, and there is nothing to choose between the policies of the last Labour government and the current coalition headed by David Cameron and Nick Clegg.

Britain’s output (GDP) today remains firmly below the level reached in 2007. That means – believe it or not – that for us the Great Financial Crisis will last longer than the Great Depression of the 1930s.

By 1934, Britain’s GDP had recovered enough to pass the pre-Depression level of 1929. But even if all goes according to plan, it may be several years before Britain regains its 2007 position. In other words we will have suffered the best part of a lost decade of growth.

On the bright side, unemployment remains lower in Britain than in most parts of the eurozone. We still have our own currency, exchange rate and central bank, and can use monetary policy (low interest rates and quantitative easing) to soften the impact of the crisis.

Optimists might also point to the fact that the International Monetary Fund expects the UK economy to outperform three of our large neighbours – France, Italy and Spain – in 2013 and 2014, and to keep pace with Germany.

But France, Italy, and Spain all suffer the disadvantage of being locked inside the eurozone (which is set up to favour Germany) so it is hardly surprising that they are in a worse state than Britain. GDP in the UK continues to fall further behind GDP in the other big English-speaking economies, Australia, Canada, and the United States.

Japan – sometimes dismissed as a “zombie” economy – might offer the best comparison to Britain. In the 1980s, Japan grew strongly, prompting a bubble in asset prices, including property. The bubble burst in around 1990 and property prices are still depressed nearly 25 years on.

Over the 1990s and 2000s, Japan slipped listlessly in and out of recession. Government policy has been inconsistent, swinging between attempts to boost demand and impose austerity.

Japan’s underlying problems were structural. The big industrial firms had lost their competitive edge, the banking sector was bust, and the population was aging.

There are of course differences as well as similarities between Britain and Japan, but if nothing else the Japanese story shows that it is possible for an advanced economy to experience several decades of stagnant or low growth. That is an unpalatable message for all British political parties.

What can be done? The Great Financial Crisis has brought back to the surface a number of structural problems in the British economy, including regional disparities.

In the 19th century, Britain’s economic strength lay in the regions, especially in the North. But today, the London economy dominates Britain to a far greater extent than the Berlin economy dominates Germany.

The Archbishop of Canterbury’s proposal that a major bank be split up to create new regional banks, though hardly new, makes a lot of sense.

In the 19th century, towns 
like Sheffield and Oldham even had their own stock exchanges. Britain has a workforce that on paper is fairly well-educated, but does it really have the skills valued in a modern economy? Investment in the most useful sorts of “human capital” would increase the economy’s growth potential. I simply identify a couple of areas where change might be beneficial.

But structural reform is a slow process. Action is needed today, and it would be better to boost the economy than to suppress it through further austerity. Any boost should come through tax cuts (or tax refunds) and infrastructure spending, rather than greater welfare spending.

The latest research on the crisis in the eurozone shows 
that austerity is counter-productive, leading to reduced economic activity and a heavier rather than a lighter burden of government debt.

However, experience suggests that the coalition and the next government – whether Labour or Tory-led -– will be satisfied to fiddle at the margins while 
hoping that Britain will be rescued, until next time, by a global economic recovery.

Why? Because that’s how the market for political office works.