During this election
period there has been plenty of analysis that looks at how the
economy has performed since 2010 (the
IFS here for example). All show the UK performing very
badly indeed. But how much is that down to macroeconomic policy
mistakes, and how much is due to factors outside the government’s
control? I will attempt to answer that question in this post, and try
to be as conservative as possible.
I will begin with
austerity, because it’s a calculation I have already done. The
table below is taken
from this post.
The first row comes
from an analysis
done by the OBR (Chart E on page 27). The main
negative impact on growth came in the first two years as public
investment was cut back sharply, but continuing fiscal consolidation
in later years reduced aggregate demand by significant amounts. The
key issue is how persistent these impacts are. To see what
persistence means in this context, consider a hypothetical example.
Suppose cuts in
public investment in 2010 reduce GDP in that year by 1{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}. Public
investment stays at this lower level in 2011. Other things being
equal, does GDP stay 1{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} lower in 2011, or do other components of demand rise to take the place of some of that lower public
investment? In normal circumstances the answer to that question would
be the latter, because central banks would react to lower GDP by cutting
interest rates which would stimulate private spending. However
throughout the period examined above interest rates were at their
lower bound, so this couldn’t happen. But other factors (e.g.
Quantitative Easing) may have crowded in private demand to some
extent.
In this calculation
I assumed that the impact of fiscal consolidation decayed by a factor
of 0.8 each year. The third row therefore gives the impact of
austerity on the level of GDP in each year over this period. For
example, the OBR estimate there was no fiscal consolidation in
2017/18, so the impact of past austerity on the level of GDP in that
year is to lower GDP by 2.1{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} x 0.8=1.7{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}. In theory austerity would
have had some impact after 2017/18, but interest rates started rising
at the end of 2017, suggesting that the Bank thought there was no
longer much deficient demand.
However it is also
likely that the earlier prolonged period of deficient demand had an
impact on how much the UK economy can supply. I examined
this here. The argument is that productivity improving
investment was lost during the austerity period, and that had a
longer lasting impact on UK productivity and the stock of capital.
The problem here is attaching numbers to this idea. Empirical
estimates can sometimes be very large (for
example here), and the IMF study I
looked at here is also consistent with austerity
(fiscal consolidation in a recession) having significant long term
impacts on GDP. But I want these estimates to be conservative, so I
will assume that austerity during the 2010-17 period reduced GDP
permanently by 1.5{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}.
The OBR estimate
that Brexit will end up reducing UK GDP by 4{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}. However I need more
than just a long run impact. The following is based on a
NIESR study by Kaya et al, and in particular their
Table TF4. (I’ve done some extrapolation for the initial years.)
GDP impact of Brexit
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Again I suspect this
is quite a conservative estimate for the immediate impact of Brexit,
even though their long run impact (at -5.7{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} for 2035) is greater than
the OBR’s number.
We also need to add
something for the pandemic. The UK was hit in 2020 comparatively
hard, both in terms of deaths and lost GDP, even though other
countries like Italy were hit earlier. Not only did Johnson’s
government waste the early months of 2020 with the idea of ‘herd
immunity’, but it also waited far too long in introducing
lockdowns, which meant when those lockdowns inevitably came they were
more severe and prolonged, giving a more sustained hit to GDP. UK GDP
fell by over 10{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} in 2020, compared to just over 6{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} in the Euro area.
I think it is fair to class this as an economic mistake, because the
reason the government gave for delaying lockdowns was to protect the
economy, whereas in reality they were doing the opposite.
The third and last
lockdown extended into 2021. In addition, the failure of the
government to give the NHS the resources to bring waiting lists down
after the pandemic, coupled with the steady squeeze in health funding
that preceded it, began to have a clear macroeconomic impact during
the 2020s. While
labour force participation returned to its pre-pandemic trend in most
other countries, it did not in the UK, and a
significant part of that was due to poor health.
The table below collects these three
elements together.
A conservative estimate of the economic
cost of Conservative government, {3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} GDP
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From 2011 until 2019
households were over 2{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} poorer mainly as a result of austerity, but
with additions from Brexit after the referendum. By 2024 that had
increased to being 5{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} poorer, mainly because of Brexit. That means
that the average household was losing over £4,000 worth of resources
(public and private consumption plus investment [1]) in 2024 as a
direct result of government decisions. The Conservatives like
to accumulate these things, so adding up the losses
over all fifteen years comes to (in today’s prices) a massive
£35,000 loss of resources for the average household.
Is there any way of comparing these numbers with the UK’s actual performance, either compared to history or other countries. Comparing GDP per capita growth to a trend growth line based on post-war data would give a much bigger gap, but that comparison is misleading because there were signs UK growth was slowing down before the financial crisis, and this fits with a gradual reduction in underlying growth in other countries. Unfortunately all the major economies beside China undertook austerity from 2010, so international comparison are little help here.
However, John Springford has compared growth in the UK since 2016 with a doppelgänger based on other countries, and he estimates the UK has grown by 5{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} less than these other countries suggest it should. If we combine my estimate for 2024 for Brexit and post-pandemic health we get 3.5{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}, which given the uncertainties involved is consistent with Springford’s analysis.
A UK government that enacts policies that reduce GDP by around 2{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} during its time in office is pretty unusual.
To reduce it by 5{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} is extraordinary, but then since WWII we haven’t
had a government that has cut public spending in a recession when interest rates were stuck near zero, or one that deliberately raised trade barriers with our
largest market.
The way these
numbers are constructed it looks like the consequences of three bad
mistakes, but I think it goes deeper than that. What connects them
all is crass economic incompetence. In each case expertise was
ignored because it didn’t fit in with ideological or political
objectives. As I have sometimes said, mistakes made by politicians
because they have followed the expert consensus are understandable
and to some extent forgivable, but mistakes made because politicians
ignore the expert consensus have to be owned by those politicians.
This propensity of
Conservative governments to ignore the economic consensus and as a
result make very costly mistakes is not unique to this period, as my
recent discussion of monetarism showed. What is really
alarming is the failure to learn from these mistakes, or even
recognise them as mistakes. This isn’t just the natural reluctance
of politicians to admit error, but goes far deeper. The Conservatives
have created through the right wing press, pressure on the
BBC, think tanks and rich donors an alternative reality for
themselves, where disasters are seen as triumphs never to be
questioned. Which is why in this election they are plugging tax cuts
despite crippled public services, refusing to recognise the costs of
Brexit and where even the delayed pandemic lockdowns are seen as a mistake.
As a result, as
things stand any future Conservative government will be likely to
continue to make serious economic policy errors that cost most UK
households a substantial amount in lost income and resources.
[1] The idea of
household resources (GDP divided by the number of households) is less
familiar than, say, household income, but in my view it is a better
measure of underlying welfare. It includes, for example, public services like the NHS,
which household income does not. It is of course just the household equivalent of GDP per capita.
