‘Deliver a strong economy’: in detail

Some promises made in manifestos are of a scale and complexity that our usual 250-word assessments can’t do justice to. The promise to Deliver a strong economy is one such case where we need opinion from the leading economic institutions to be able to give a balanced and credible verdict. But even for us to make an initial assessment, it took a huge amount of research and expertise from one of our volunteers. So to give you the full picture of how we got there, here’s the initial assessment from Tamora Sita Dhanipersad.

This isn’t an easy promise to measure. The economy is the often the main issue that elections are fought on (even during Brexit!), so it’s common for parties to make clear and bold promises about how they can improve economic prosperity in the UK.  A “strong economy” traditionally implies the following:

  • A high rate of economic growth as measured by an increase in Real Gross Domestic Product (also known as “constant-price” GDP). In real life terms this is understood to mean increased living standards, improved tax revenues and new jobs. GDP has many kinds of measure, for instance: GDP growth (the percentage growth compared to the previous year), GDP PPP (Purchasing Parity Power) or nominal GDP (aka current GDP). Controversy can arise between measures of GDP, and there are many different types suitable for different uses. There is also a fair amount of debate about how good any measure of GDP is as a way of determining the ‘health’ of an economy. This debate focuses around the fact that whilst GDP indicates living standards it encompasses a very small amount of information on what most people want from a strong economy which has more to do with their personal and financial well-being.
  • Low and stable inflation. Generally speaking inflation is understood to be good if it’s between 2% and 4%. The UK’s current inflation target is 2%.
  • Low unemployment

There are many other indicators frequently referenced by economists, our government and the media. These include:

  • The balance of imports and exports, and the status of both. We want to export (sell) more than we import (buy) as a country.
  • Labour productivity. This measure reflects the amount of GDP produced in an hour of working.
  • Increased investment from business, this is also an indication of confidence in the economy.
  • Decreased government borrowing, indicates that taxes are bringing in more, which in turn reflects that we are making more.
  • Consumer and Business confidence, which indicates how optimistic people feel about the economy.
  • Rising interest rates. This indicates that people will spend less and therefore demand for goods and services drop which causes inflation to fall.

As you can see, many of these indicators overlap. For instance if you look at Real GDP and Labour productivity you are essentially looking at GDP divided into the number of working hours. This fact, like the many measures of GDP, is also a source of controversy, as it can lead to less scrupulous sources cherry-picking measures and time periods to suit the case they are making. To avoid this, and to judge the policy on its own terms, we will concentrate on the traditional indicators, as well as those mentioned by the government in their manifesto:

A strong economy built on sound public finances, low taxes, better regulation and free trade deals with markets around the world.

Conservative Party Manifesto 2017, p.12

However there are also some tensions and dependencies in these criteria. Low taxes and sound public finances are related, as the majority of public finance comes from taxation. Better regulation is a way keeping companies fair and strengthening the economy, done well it leads to savings in governmental budgets which can in turn be used to support public finance and low taxation. Likewise the reference to free trade deals is aimed at our balance of imports and exports globally. Basically the economy is a balancing act, like driving a train with many different levers; you push one to stoke the engine for a stronger economy, you will have to balance the others or risk your engine exploding. Our verdict therefore is a balancing act.

So to assess the progress on this we will look at four questions: How strong is the UK economy?, How low is taxation? Has regulation improved? What free trade deals has the UK made? The soundness of public finance is a combination of these questions and more which we will turn to at the end. Additionally, we should bare in mind at the final verdict that these promises all have one goal, to improve the rate of economic growth and hence the strength of the economy.

Furthermore it is important to realise that the other indicators outside traditional ones, and the taxation and trade deals mentioned in the policy, are all supporting actors cast and deployed in order to make sure the leading lady (the rate of economic growth) shines!

How strong is the UK economy?

To put what follows in context, the UK (by any measure of GDP) sits comfortably within the top 10 economies. It is 6th in current rankings of nominal GDP and 9th in terms of GDP adjusted by PPP (see the fullfact.org link for an explanation). The global economy is in what the IMF terms ‘a synchronised slowdown’ with the subdued growth seen as a consequence of rising trade barriers, increased uncertainty in trade and geopolitics (by which they include Brexit) and strain in emerging markets (many of whom we would look to trade with) and low productivity growth and ageing demographics in advanced economies (which includes the UK). Simply put things are not great, the global growth forecast in 2019 is 3.0% world GDP and predicted changes in that growth are down to 0.2% from 0.4% compared to previous forecasts.

The Office of National Statistics currently reports a 0.3% growth in the UK’s GDP. This follows the first drop in GDP growth in 6 years in the previous part of the year that raised fears of a recession. This lead Savid Javid, as Chancellor of the Exchequer, to release a statment in August 2019 stating that “…the fundamentals of the British economy are strong…” in which he cites strong wage growth, record highs in employment and the fact that we are forecast to grow faster than Italy, Japan and Germany. Inside the evidence stated (as you can see by the links) the government are mostly correct. The debate arises in the context of the chosen indicators presented as evidence and your definition of ‘fundamental’, which is not in line with traditional views in this statement, nor in more progressive views of economic health as seen in debates around the use of GDP as a indicators of economic health.

Missing from the government’s “fundamental” indicators and present in traditional ones is low and stable inflation. In this the government gets corroborating evidence, UK inflation is currently 1.7% slightly under the 2% target and is “ok”. However alternative indicators are less supportive: real wages, which are arguably what people feel in terms of their personal finance, are lower than before the 2008 recession (see ONS report for July 2019 on Average Weekly Earnings). Also revisions to GDP forcasts has the UK mostly performing in line with Italy, Germany and Japan, this is not surprising in the global context.

If you follow the ONS links and the IMF data together it shows that whilst the UK economy is what economists like to term ‘lukewarm’. Its not strong and its not weak, its ‘alright’. Trends in the data have seen the UK slip slightly on most of the indicators presented, bar employment which is curiously strong. UK growth is the slowest since 2012, but we are still growing and not out of line with the rest of the world. Nominal wages are up, but real wages are terribly low. Inflation is acceptable. We could go on to consider all the other indicators but the general theme is that they are a mixed bag: some excellent, some terrible. In traditional terms the UK economy is OK currently depending on how Brexit is resolved and the state of the global economy.

How low are UK taxes?

This could be judged in many ways but most would judge a) in comparison to previous governments and b) in comparison to other countries. The latter is simpler to address. The OECD produce tax revenue statistics which show tax burden (tax as a percentage of GDP), in which the UK is mid-ranking. Our tax burden has not really changed since 2000, indicating that the net changes in tax measures has not really changed how much tax we pay in respect to what we earn overall despite changes in individual taxes.

Comparison to previous governments is difficult. The Office of Budget Responsibility (OBR) lists in its Policy Measures database 216 tax measures stemming from Budgets and Autumn or Spring Statements the net effects of which are different for every individual based on the taxes they pay and overall the net effects (are taxes as a whole higher or lower) is not readily assessable. Overall governmental policy in this time has to be to increase tax revenues not by increasing taxes but by eliminating tax avoidance. There has then been a range of cuts or effective cuts in larger taxes (Income tax especially has seen above inflation raises to personal allowance) and increases in smaller taxes (such as those that relate to businesses and finance). The latter can be judged from the OBR’s tax by tax spend.

However, the government has announced top-up plans for spending since March 2019 and pre-election style promises indicate tax cuts. This is a diffcult line to take since generally speaking lower takes means less money for the government to spend on public services. In comparison to spending our taxes are already low, futher cuts raise controversy.

Has regulation improved?

This is another difficult area. According to legistlation.gov.uk over 600 changes have been made to UK regulations in banking, business and other areas. The timescales, impact and judgements on these changes, if they are indeed better or worse, are mostly not within the time scale of this policy and parliament. Added to this regulation is always controversial, it makes illegal what was legal and usually does so to protect the vulnerable (human or environmental). Increasing the complexity is the fact that many of our regulations come from the EU and their continuation will depend on any deal made.

However, in general the UK has an excellent reputation globally for our regulation. The government has looked to build on this explicitly in their report on ‘Better Regulation’ and through the ‘Better Regulation Framework’ which was initiated from EU directives on Better Regulation. Their own reports show that targets are only being met in the Department for Business, Energy and Industrial Strategy and the Department for Digital, Culture, Media, and Sport. This said the OECD praises the UK approach to Better Regulation calling it “impressive” in its “vigour, breadth and ambition”, noting that “The work of the Risk and Regulation Advisory Council (RRAC) for the development of new risk-based approaches” is “potentially groundbreaking”. The OECD publication notes a few gaps and areas for improvement, including a culture and capacity gap in areas and places that could do with strengthening, but overall supports the view that the UK is a leader in regulatory practice.

What free trade deals has the government made?

Until we have left the EU completely we are not free to make Free Trade deals. The government however has been trying to roll over as many deals as they can, and where they cannot make deals they have been creating mutual recognition agreements. So far the government has made 17 continuity deals covering 47 countries and three mutual recognition agreements with the US, Australia and New Zealand. None of these in reality are Free Trade deals though.

How sound are our Public Finances?

Traditionally this is judged on our debts and borrowing, both of which are increasing. This said the backdrop of that increase has been the government’s austerity agenda was entirely designed to ‘balance the books’ in this regard and drove down both indicators. Recent developments have seen increased spending and debt in order to counteract the effects of austerity and prepare for Brexit. As such the public finances no longer look as well as they did when Phillip Hammond announced spending increases earlier this year. Part of this is also complicated by the uncertainty around Brexit once again, as any judgement is dependent on what we can expect to bring in. As we have seen in looking at taxation (where the government shows no indication of raising taxes) and in trade deals (which we cannot fully legally negotiate at the moment) public finances are only assured of tax revenue and what we borrow as trade and regulation are bound up in Brexit. However tax revenues are increasing.

If we are to judge overall on GDP growth at 0.3% and slow real GDP growth, whilst technically growing and in line with global figures the view is positive but not very strong. This is especially true given in the long term much will depend on how the uncertainty of Brexit is resolved. Certainly the government have demonstrated that they are committed to this policy in that they are making as much progress in trade, regulation and commitment to low taxation as is possible.

At the time of writing, our assessment is that this policy is ‘in progress’. A final verdict is dependent on your view of economic ‘strength’ and whether this is traditional and reliant on economic indicators, or if its more progressive and takes in other factors of people’s well-being.

Sound links for a healthier economic understanding:

This post offers the detailed analysis to support our verdict of the government’s 2017 promise to Deliver a strong economy.