A Path Back to Growth

an IPPR publication by Tony Dolphin, Senior Economist and Associate Director for Economic Policy

Executive Summary

The UK economy is back in recession and needs to find a path that will return it to a higher growth track in the medium term. To not do so will make it harder for the country to tackle the legacies of the financial crisis, including high youth unemployment and government borrowing. In the face of serious headwinds from the eurozone, current policies – even after taking into account new initiatives such as funding for lending and the plan to guarantee up to £40 billion of spending on infrastructure projects – are unlikely to deliver the desired outcome. More effort is required to boost demand in the short term and to ensure that the economy’s growth potential is supported in the medium term.

The debate about the role of government policy in the UK’s return to recession and about Plan A or Plan A+ or Plan B has become a sterile one, focused too narrowly on the Coalition’s fiscal plans. A path back to growth will require a change in fiscal policy, but on its own this will be insufficient. To be effective, policymakers need to make a number of complementary shifts in policy.

These shifts should be designed to reduce uncertainty about the economic outlook. This will encourage households to consume and business to invest and to hire more workers. Private sector companies will only be engines of growth in the UK if they can foresee a positive outlook and healthy returns on their investments. That is patently not the case at present.

Growth on its own is not enough. It needs to be accompanied by reform to address long-standing weaknesses in the UK economy: underinvestment, vulnerability to external shocks, poor export performance and persistent inequalities. The path back to growth should also be a path to a different kind of British capitalism.

The roadmap for growth should have six elements:

1. an increase in the scale of quantitative easing
2. fiscal measures to boost growth in the short term combined with a reaffirmation of the plan to eliminate the deficit in the medium term
3. additional infrastructure spending
4. measures to make household debt restructuring easier
5. measures to keep the long-term unemployed in touch with the labour market
6. an active industrial policy.

Each of these elements would reinforce the others and increase the chances of a return to sustained growth in the UK over the next year (or, in a worst-case scenario, minimise the impact of a deepening crisis in the eurozone).

Full text (PDF 24pp)

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