Britain's economy
Why worry?
Nov 25th 2004
From The Economist print edition
Economic success has made Britons smug. That's dangerous
IT TOOK about 20 years to repair the damage done to the British economy in the 1960s and 1970s. First came Margaret Thatcher's microeconomic reforms in the 1980s—privatisation, deregulation and laws to restrict the trade unions. Then came Labour's blow for macroeconomic stability—handing over monetary policy to the Bank of England in 1997. Together, these moves transformed the British economy from one of the worst in the rich world to one of the best. Which is why, when Gordon Brown, the chancellor of the exchequer, gives his pre-budget report on December 2nd, explaining the position of the public finances, he will do a certain amount of trumpeting about the government's economic success.
Britons have come to expect that sort of thing. It took a long time for them to shed their sense of post-imperial decline; but, after years of impressive economic figures, they have grown comfortable with their success. Too comfortable, perhaps: grateful, and understandably so, for this government's contribution to their current sense of economic well-being, Britons are not paying enough attention to the ways in which Labour is undermining the success that it helped nurture.
Those poor, sad French and Germans
By the standards of most rich-world countries, Britain's economy, which should grow by 3.2% this year, looks pretty good, but the comparison with Europe shows it in a particularly favourable light. France will grow by around 2.4% this year, Germany by 1.5%, Italy by 1.1% and the euro area as a whole by 1.8%. Unemployment is running at 4.6% in Britain and 8.9% in the euro area. The contrast is particularly satisfying to Mr Brown—not just because everybody likes to do better than the neighbours, but also because he takes the credit for preventing Tony Blair from taking Britain into the euro.
There are, of course, a few obvious worries. The high price of oil will shave growth—though probably by less than elsewhere, partly because Britain remains a significant oil producer, and partly because manufacturing makes up a relatively small share of its economy. More troubling is Britain's turbulent and overpriced housing market, which 15 years ago pitched the economy into recession. Now that house prices seem to be falling once more, there are fears that the same might happen again.
That is unlikely. The economy is more resilient than it was in the late 1980s and early 1990s, largely because it is better managed. Inflation, interest rates and unemployment are low, so the chances of people running into serious difficulty with their mortgages are also lower than they were then.
If these two much-talked-of threats are not as serious as is generally supposed, where's the problem? Not so much in the vagaries of the world economy or the housing cycle as in the more controllable area of government policy—specifically, public spending and regulation.
At 42.6%, the state's share of GDP in Britain still contrasts favourably with the euro area's 48.4%. But euro-area governments understand that their high spending and consequent high taxes have undermined competitiveness, and are therefore cutting the state's share of GDP. Britain's politicians, meanwhile, are raising taxes and spending in order to move towards the social-democratic ideal with which other Europeans have become disillusioned. When Labour came to power, in 1997, the gap in public spending's share of GDP between Britain and the euro area was 9.2 percentage points. Now it is 5.8 percentage points, and still falling.
Businessmen used to dealing with regulations in the rest of Europe often speak enthusiastically about the contrast between Britain and the mainland. That may not last. British business is being buried by a pile of new regulations. Some—such as the working-time directive—come from Brussels. Some don't. This supposedly business-friendly government increasingly uses companies as unpaid state employees. Through their payrolls, they now have to do 23 jobs for the government, from doling out maternity pay and tax credits to collecting fines and student loan repayments. When Labour came to power, the number was 15.
British people are not, according to polling figures, worried about the economy. It has slipped way down their list of priorities: according to YouGov, a pollster, the economy is currently 13th on the list of voters' top concerns. Given how comfortable things are, that's not surprising, but it is troubling. Voters ought to be worried: it takes longer to repair an economy than it does to ruin one.
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Why worry?
Nov 25th 2004
From The Economist print edition
Economic success has made Britons smug. That's dangerous
IT TOOK about 20 years to repair the damage done to the British economy in the 1960s and 1970s. First came Margaret Thatcher's microeconomic reforms in the 1980s—privatisation, deregulation and laws to restrict the trade unions. Then came Labour's blow for macroeconomic stability—handing over monetary policy to the Bank of England in 1997. Together, these moves transformed the British economy from one of the worst in the rich world to one of the best. Which is why, when Gordon Brown, the chancellor of the exchequer, gives his pre-budget report on December 2nd, explaining the position of the public finances, he will do a certain amount of trumpeting about the government's economic success.
Britons have come to expect that sort of thing. It took a long time for them to shed their sense of post-imperial decline; but, after years of impressive economic figures, they have grown comfortable with their success. Too comfortable, perhaps: grateful, and understandably so, for this government's contribution to their current sense of economic well-being, Britons are not paying enough attention to the ways in which Labour is undermining the success that it helped nurture.
Those poor, sad French and Germans
By the standards of most rich-world countries, Britain's economy, which should grow by 3.2% this year, looks pretty good, but the comparison with Europe shows it in a particularly favourable light. France will grow by around 2.4% this year, Germany by 1.5%, Italy by 1.1% and the euro area as a whole by 1.8%. Unemployment is running at 4.6% in Britain and 8.9% in the euro area. The contrast is particularly satisfying to Mr Brown—not just because everybody likes to do better than the neighbours, but also because he takes the credit for preventing Tony Blair from taking Britain into the euro.
There are, of course, a few obvious worries. The high price of oil will shave growth—though probably by less than elsewhere, partly because Britain remains a significant oil producer, and partly because manufacturing makes up a relatively small share of its economy. More troubling is Britain's turbulent and overpriced housing market, which 15 years ago pitched the economy into recession. Now that house prices seem to be falling once more, there are fears that the same might happen again.
That is unlikely. The economy is more resilient than it was in the late 1980s and early 1990s, largely because it is better managed. Inflation, interest rates and unemployment are low, so the chances of people running into serious difficulty with their mortgages are also lower than they were then.
If these two much-talked-of threats are not as serious as is generally supposed, where's the problem? Not so much in the vagaries of the world economy or the housing cycle as in the more controllable area of government policy—specifically, public spending and regulation.
At 42.6%, the state's share of GDP in Britain still contrasts favourably with the euro area's 48.4%. But euro-area governments understand that their high spending and consequent high taxes have undermined competitiveness, and are therefore cutting the state's share of GDP. Britain's politicians, meanwhile, are raising taxes and spending in order to move towards the social-democratic ideal with which other Europeans have become disillusioned. When Labour came to power, in 1997, the gap in public spending's share of GDP between Britain and the euro area was 9.2 percentage points. Now it is 5.8 percentage points, and still falling.
Businessmen used to dealing with regulations in the rest of Europe often speak enthusiastically about the contrast between Britain and the mainland. That may not last. British business is being buried by a pile of new regulations. Some—such as the working-time directive—come from Brussels. Some don't. This supposedly business-friendly government increasingly uses companies as unpaid state employees. Through their payrolls, they now have to do 23 jobs for the government, from doling out maternity pay and tax credits to collecting fines and student loan repayments. When Labour came to power, the number was 15.
British people are not, according to polling figures, worried about the economy. It has slipped way down their list of priorities: according to YouGov, a pollster, the economy is currently 13th on the list of voters' top concerns. Given how comfortable things are, that's not surprising, but it is troubling. Voters ought to be worried: it takes longer to repair an economy than it does to ruin one.
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