In an ideal world, the sky is the limit for our economy, but the world we live in isn't idealby George Magnus / January 15, 2015 / Leave a comment
In a rousing speech to the Royal Economics Society, George Osborne has said that he thinks that the UK could be the richest country in the G7 by the 2030s, as measured by income per head. Is the Chancellor sharing new-found optimism, or is he just cheerleading?
Let’s begin at the beginning. According to IMF data for 2014, UK income per head was $44,000; we ranked fifth in the G7. As you might expect, the US headed the list with $54,600, followed by Canada, Germany, and France. Then came the UK, trailed by Japan and Italy. The IMF makes projections out to 2019 when the US still comes top at $67,000, followed by Canada and Germany as now. But the UK moves up to fourth place at $55,500, and is now followed by France, Japan and Italy.
Suppose these numbers are broadly correct. Could the UK surpass the US by 2030? The maths suggest it would be demanding. True, the UK’s projected 4.5 per cent per annum growth in income per head to 2019 is slightly faster than the US. If we project that growth rate to 2030, it’s quite possible that the UK could top Germany and France. But the main reason for that would be the consequences of rapid ageing in Germany and the assumption that, provided the Eurozone holds together, trend growth in the area would be low.
For the UK to overtake the US, income per head would have to grow by a little over 6 per cent per year over the next 15 years—which is getting on for China-type performance. This seems very unlikely, unless either the UK population starts falling, which it isn’t expected to, or there’s an surprise pick-up in the country’s potential growth rate, when that of others is under pressure. All the available evidence suggests this too is unlikely.
The key to the Chancellor’s upbeat comment though was a later passage in his speech: “If we are willing to take on the vested interests and pursue the right policies with consistency and discipline, then there are no limits to what Britain can achieve.” This is a little bit like motherhood and apple pie. In other words, if we do all the right things, we can be super-successful. No one could disagree. The chances of that happening, though, are pretty slim.
The strategy for debt and deficit reduction is incomplete. It relies on a further erosion in private sector savings and higher tax revenues, at a time when government cuts are poised to intensify and when the private sector is most unlikely to incur higher indebtedness.
A strategy for an ageing population—by which I mean how to re-align personal and public rights and responsibilities when it comes to healthcare, pensions and other age-related spending—doesn’t exist. We simply cannot carry on as we have for the last several decades. Choices have to be made when resources are tight.
We also need much more in the way of a growth strategy that will out-live the electoral cycle and that doesn’t rely on credit and banks. Encouragement of education, skill formation and training will help income growth to become more robust. Incentives to invest and to innovate using new technologies will help to strengthen productivity. Boosting the economy’s infrastructure where there are blockages or inefficiencies will improve efficiency.
Hopefully we’ll do some things right, sustain growth in income per head at about 4 per cent a year, and have a decent attempt to lift our position in the G7 as others falter. But as things stand, I’m not even sure the Chancellor himself really believes we could oust the US by 2030.