Opponents of increased public spending have a stranglehold on Britain’s political and public discourse. There was a brief hiatus after the financial crisis, when it was accepted that the government needed to intervene in the economy to bolster demand, but since then the deficit hawks have largely held sway unchallenged. They argue that any increase in government spending will simply push up inflation and increase already unsustainable levels of public debt and/or that a smaller state will inevitably lead to faster economic growth.
The combination of these two beliefs is doing permanent damage to Britain’s economy by unnecessarily holding back demand and further eroding the quality of the public goods—infrastructure, affordable housing, skills—upon which economic growth increasingly depends. They reflect political ideology rather than economics: the sustainable level of demand in an economy is not determined exogenously; government policy helps determine it.
Pessimism about the growth potential of the UK economy rests on a belief that the collapse in productivity growth—productivity is barely higher than a decade ago—is all down to a weakening of technological growth (compounded by population ageing). The government cannot stimulate the economy because there is no surplus capacity; boosting spending will simply push up inflation and wages, hitting profitability and hence investment and jobs. The collapse in in productivity growth has little to do with weak demand and under-utilised resources.
This reflects circular reasoning and is self-defeating. First, productivity growth has slowed in other countries, but by nowhere near as much as…