In this piece Paul Johnson, Director of the Institute for Fiscal Studies, strongly emphasises why growth is essential and urgent if we are to improve living standards and cover the costs of vital public services. Paul highlights the scale of the challenge and the consequences of failing to address the problem of a lack of growth across the past couple of decades.
The essential and urgent need for growth
I am writing this for the “good growth” hub. The World Bank is all in favour of “equitable growth”. “Sustainable growth” is the term on everyone’s lips nowadays as we worry about climate change and environmental costs. Who could be against good, equitable and sustainable growth?
Well, obviously, I’m not against any of them. But this insistence on appending these conditioning adjectives to any discussion of growth makes it look as though growth itself is a dirty word, something undesirable, unless accompanied by such indications of moral worthiness. It seems to indicate a certain squeamishness about growth itself. It’s a squeamishness which has affected policy here in the UK and elsewhere. If unthinking protection of our unlovely greenbelt is bad for growth, so be it. We need growth to be good and sustainable. The same goes for building roads, or airports or pretty much anything. If taxing rich people and companies is bad for growth, that’s OK, we need growth to be equitable. If the courts get involved in setting the pay of millions through bizarre interpretations of equal pay rules, in ways which will reduce employment and growth, that’s fine too.
In those terms the last 20 years have been a triumph. They have been phenomenally equitable. Income and earnings inequalities have both declined. The gap between the bottom ten per cent of earners and the median has dropped dramatically. Even the incomes of the top couple of per cent have been held back, as their contribution to the direct tax take has grown while their pre tax incomes have hardly budged. Meanwhile the UK has led the way internationally on reducing greenhouse gas emissions, cutting them by a half since 1990. Very equitable. Very sustainable. Very good.
There’s a problem here though: a total lack of growth. We’ve had the slowest growth in earnings and in income per capita in, perhaps, two centuries. Average earnings are at least £10,000 lower today than they would have been had pre-2008 rates of growth continued. That is a huge hit to someone on a median full-time salary of well under £40,000. The absolute poverty rate, that is the fraction of the population below an income fixed in real terms, has been very sticky since 2008, having fallen fast in the high growth decades before that. The poor are getting no better off.
Lack of growth doesn’t just hold back living standards, it destroys opportunity. Earnings have barely risen, but wealth has. Younger generations are struggling because lack of growth, accompanied by soaring house prices created in part by anti-growth policies, and this has left them adrift, unable to buy their own homes or save enough for a pension. The result is that inheritance and parental gifts have become far more important in determining the lifetime income and wealth of younger generations. There’s a reason for all those columns on the “bank of mum and dad” providing deposits for house purchases by their fortunate progeny. Inheritances will be something like twice as important for those born in the 1980s than for those born in the 1960s. But not for those unlucky enough to have been born to less wealthy parents. As levels of wealth increase and earnings remain static it becomes harder and harder, nigh on impossible, to save your way up the wealth distribution. Lack of growth is itself a creator of generational inequity and social immobility. Economic growth may not quite be a sufficient condition for escaping from our current, appalling, equilibrium, but it is for sure a necessary condition.
And what about our public realm? How is it that we have a tax burden at its highest level ever and yet our public services seem starved of money? There are plenty of culprits of which high interest payments, an ageing population and ever-growing demand for healthcare are but three of the most obvious. But again, underlying lack of growth is the most fundamental and pernicious of our problems. If income per head doesn’t grow, then the only way of getting more money for public services is to take an ever higher fraction of that income. Even if we can keep spending on some services flat – and that is a struggle given public demands – we know we can’t manage that in health, and health spending is by far the biggest budget of all. Defence spending is now also going to have to rise. Without growth we just won’t be able to afford any of that unless we are willing to raise the tax burden more and more and hence reduce our disposable incomes.
Think also about the pension triple lock: the rule that the state pension needs to rise every year by the higher of price inflation, earnings growth, or 2.5 per cent. That has only been expensive relative to the legislated annual increase, in line with earnings growth, because growth has been so poor. In normal – pre 2008 – times it would have cost next to nothing. Earnings really should be growing more than prices and more than 2.5 per cent. When they don’t the burden of supporting an ageing population becomes harder to bear. And our population will be ageing a lot more over the coming decades. Supporting that without growing our economy will mean yet lower living standards for the bulk of us.
I have nothing against good, equitable and sustainable growth. But what we must prioritise is growth. Without it nothing good, equitable or sustainable is possible.
About the author
Paul Johnson has been director of the Institute for Fiscal Studies since 2011. He is a columnist for The Times, and is a regular contributor to other broadcast and print media. He is a visiting professor in the UCL Policy Lab and at the UCL department of economics. He was for 10 years a member of the UK Climate Change Committee, and has served on the council of the ESRC and of the Royal Economic Society. Paul led reviews of pension auto-enrolment and of inflation measurement for the UK government, and of fiscal devolution for the Northern Ireland executive. Previous roles have included time as chief economist at the Department for Education and as director of public spending at HM Treasury, where he also served as deputy head of the government economic service.
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