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No politician should get credit for saying they are “pro-growth” — it’s a bit like claiming to be “pro-health”. Yet it is a welcome sign that British MPs are clamouring to burnish these credentials ahead of this year’s election. Chancellor Jeremy Hunt delivered, by his own account, “110 growth measures” in his Autumn Statement, and Labour leader Keir Starmer promises growth will be his government’s “obsession”.
Now it is time to get specific. For that, the next government must have a better understanding of how policies affect long-term growth and the fiscal situation. The Office for Budget Responsibility — which this week said that government plans to squeeze public spending were worse than a “fiction” — currently has this task.
For each Budget, the public finance watchdog estimates the UK’s annual potential growth rate. This helps it assess whether the government’s preferred fiscal rule — to have the debt to gross domestic product ratio falling within five years — will be met.
This first involves growth accounting — looking at demographic trends, investment plans and technology — to establish a potential growth rate, which it currently estimates is 1.6 per cent per year. Second, it scores the chancellor’s policies for its impact on that number.
The first task is like trying to “look through a crystal ball, yet the potential growth number is the most important thing the OBR does”, says Andy King, who worked there for over a decade. The OBR’s productivity forecasts, which feed into its estimate, often miss the mark. Methods vary, too. The Bank of England, which will conduct a “supply side stock take” next week, think it is around 0.8 per cent.
The second task is just as hard. For instance, estimating the growth impact of a new housing or rail development plan requires local analysis — and judgments on the likelihood of hitting delivery targets. Sam Dumitriu, head of policy at Britain Remade, says the potential impacts of things like planning and electricity grid reforms would largely be ignored by the OBR. “We need to have a larger evidence base on the supply-side of the UK economy — what gets measured gets managed.”
Even slight inaccuracies or omissions in the OBR’s growth estimate can have significant implications. It determines the “fiscal headroom” and influences which measures the Treasury pursues. Changes to interest rate and inflation forecasts alone bring uncertainty, as the watchdog’s chair, Richard Hughes, highlighted on Tuesday.
Efforts to make such an important and disputed number more precise would be invaluable. One option is to beef up the OBR. “With more [staff], it could collect more data, develop its models, commission in-depth studies, and produce better growth uplift estimates for certain measures,” says King.
A more radical option is to create a new independent institution with a focus on measuring potential growth and the impact of supply-side policies. This would then feed into the OBR’s forecasting. It would also build a body of evidence on growth policy options, develop think-tank proposals, verify manifestos and improve the measurement of the intangible economy.
This idea has several advantages. First, it reduces the burden on the OBR so it can focus on nearer-term tax and spend issues. There is currently too much dependence on its verdicts, which risks undermining its credibility. Just this month, some Conservative MPs claimed its errors were “holding back the country’s recovery”.
Second, support for a new entity to develop a long-term UK growth strategy is growing. The need arises in part because the Treasury is often too bogged down by short-term fiscal matters. For instance, Andy Haldane has recommended a new economy ministry, focused on growth. And indeed, it is the government’s responsibility to determine what measures are put forward. But even this ministry’s recommendations would need accountability, since growth and fiscal sustainability are inextricable. The incentive to push for unsustainable tax cuts would remain.
That is where an independent growth forecaster comes in. As its work would factor in to the OBR’s projections, it would have salience for MPs, the chancellor, any future economy ministry and the media — helping to improve the quality of the debate around growth. It would guide government decisions, without being overly interfering.
This will not solve Britain’s problems. A rethink of the fiscal rules — which are easily gamed, and can ironically incentivise the government to slash growth-enhancing public investment plans — is essential. But if the UK wants to have a serious conversation about growth, better measurement would be a good place to start.
