The new government has put economic growth at the forefront of its agenda. The King’s Speech last week outlined wealth creation for all communities as a priority, with the objective to see living standards rise in all nations and regions in the United Kingdom.
There are a lot of positives associated with targeting economic growth. Among them, making the economy larger provides more resources for the government as the tax take tends to rise. Some of that additional tax revenue can then be used to improve public services, as well as increase investment on the transition to net zero or on other areas where the government may now need to spend more, such as defence.
Stronger economic growth, when it is driven by higher productivity, may also lead to stronger growth in people’s earnings and improve their living standards, as well as provide an opportunity for households to increase their wealth. So it is not surprising that the current government and many before, not just here in the UK, have chosen to focus on this goal.
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Unfortunately, it is not all down to the new government how the economy will perform. The UK is a small, open economy that depends on the fate of other economies, and the decisions made by their governments. An increase in trade protection measures by some of the UK’s main trading partners, for example, will hurt our exports, while weaker growth in some of our main export markets will also hinder UK growth momentum.
Any actions by the government to lift the growth momentum, including much needed investment in infrastructure and skills, are structural in nature and it is likely to take time before it can reap their full fruits, probably well after the end of the current parliament.
Putting all that aside, growth at all costs may not be the optimal choice in any case. Government will need to consider a range of issues, as economic growth can sometimes have side-effects.
A larger economy that produces and consumes more will often do that at the expense of depleting more of our natural resources; it will require more energy and create more pollution. Governments therefore need to consider in tandem measures to mitigate the implications of growth on the environment.
The fruits of economic growth also do not normally occur equally across the population, and being able to address the potential rise in inequality without stifling innovation and entrepreneurial incentives can be hard.
Similarly, growth is unlikely to be uniform across the country. Centres of agglomeration, where economic activity tends to be more concentrated, are usually more productive and enjoy stronger economic growth. Devolution of power to encourage more local decision-making in investment and the distribution of resources may not be enough if the initial investment pot to lift growth in local areas is small or the local knowhow is scarce.
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People can value access to “good jobs” and job satisfaction above other things that improve their quality of life. Technology plays an important part in increasing economic growth as it increases labour productivity, but if increased use of technology reduces people’s sense of fulfilment from work, they may feel worse off despite nominally producing more. Ensuring people’s skills continue to match new technologies and they are not left behind will only partially address that.
In recent years, perhaps triggered by the Covid-19 pandemic shock, we have seen a larger proportion of the population putting a greater emphasis on improving their quality of life, prioritising mental health and seeking to live at lower stress levels. Helping them achieve their goals may not be solely possible by increasing the economic growth of the UK.
While the government inherited very constrained resources, by focusing on growth it should see them increased. But it will need to be careful not to lose sight of other important goals.
Yael Selfin is vice-chair and chief economist at KPMG
