After the longest double recession since the Second World War, the economy is growing again. Whilst a growing economy is obviously better than a contracting one, the UK is far from out of the woods. Two and half million people are out of work, one third of them have out of work for over a year, three million are ‘under-employed’ unable to get the hours they want, real wages have been falling for almost three years now, youth unemployment remains around the one million mark and the longer term picture is of an economy that has barely grown for two years.
Now is not the time to break out the bunting and declare the crisis over.
Since the fall of Northern Rock, over five years ago, the media have become so used to bad economic news that the bar for success has been set low. Any level of growth is now seemingly hailed as a victory for the Government and a vindication of its policies. In reality the ‘recovery’ is far from secure and as long as the squeeze on living standards persists this won’t feel like a recovery to most people.
The challenge facing the country is actually two-fold and runs much deeper than simply generating growth. We need not only to get the economy moving again, but to generate the ‘right’ kind of growth. We can’t simply return to business as usual, instead we need to build a new economy.
In the years before the crash things started to go seriously wrong in the UK economy. Growth became more and more concentrated in too few sectors and too few regions. The gains from this growth were increasingly captured by too few people.
In the five years between 2003 and 2008, the years before the recession, the economy grew by 11% but median real wages (the pay, after price rises, of those in the middle) were stagnant. Over three decades of a liberalised economic model, the public finances became too dependent on tax revenues associated with a booming city and a frothy property market. Household debt rose as easy credit replaced rising pay packets. London and the South East’s share of the economy rose steadily whilst the other regions and nations fell behind. The contribution of financial services to GDP rose from around 6% in the mid 1990s to 10% on the eve of the crash. The level of investment in the real economy was weak by international standards. By 2008 we had an unbalanced economy, one that was vulnerable to sudden shocks.
Most forecasters now believe that the economy is set to grow in 2013 and 2014. The latest forecasts from the CBI have growth at 1.4% in 2013 and 2.0% in 2014. This would be a very weak result – just two years ago the Government’s own independent Office for Budget Responsibly assumed growth would be 2.9% and 2.7% in those years.
More worrying than the weak headline growth numbers though are the forecasts for living standards and unemployment. The CBI sees no rise in real wages for another 18 months and unemployment still at 2.4 million at the end of 2014. This simply isn’t good enough.
A meaningful recovery, what could be thought of as a ‘One Nation recovery’, would be marked rising real wages for those in the middle and below. The policy challenge is not just to generate growth but to generate growth that is balanced across the UK, not concentrated in too few sectors, jobs rich and which doesn’t see most of the rewards flowing to those at the top.
Such growth won’t be achieved just by relying on the old levers of fiscal and monetary policy (important as they undoubtedly are), instead it will require wide spread reforms to the structure of the banking system, corporate governance, skills and training systems, a modern industrial policy, steps to support green growth and wider set of government interventions into how the labour market works to ensure we are generating the kind of better paying, higher skilled jobs that we need.
The debate now has to be about not just how we get the economy moving again but how we ensure that we get a better balanced, more resilient, fairer economy where the benefits of growth aren’t captured by those at the top.
Duncan Weldon is a Senior Economist at the TUC
This piece forms part of Jon Cruddas’s Guest Edit of LabourList