Beware the prophets of the economic miracle

'Vote for us and Britain will boom', or 'Britain is booming so vote for us', they say. But, in reality, the best they can do is try not to make big mistakes
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The Independent Online
Britain is booming? Or Britain deserves better? Both main parties are tumbling over themselves in their eagerness to promise that the UK's long slide down the world economic league table either has been, or soon will be, halted. That the national shame of being beaten by one small country or ex-colony after another in the prosperity stakes, making the English cricket team's record look positively enviable, will be a thing of the past.

But if any of us is taken in by politicians' claims and counter-claims about how much their policies can boost the nation's wealth, we will be victims of our own innumeracy. Mature economies cannot achieve big increases in their trend rate of growth, and small increases take a generation to make a noticeable difference. It is a sham to pretend that with higher investment or better schooling or lower business taxes or deregulation of the workplace - pick your panacea - Britain could grow even half as fast as the "tiger" economies of South-east Asia.

They are truly in a different league. Those countries have been catching up from an undeveloped and underindustrialised starting point. Most of their headlong expansion is down to a fast-growing labour force and to investment that rapidly boosts the stock of factories and machinery from a very small base.

This is exactly the path that Japan forged earlier. Like Japan, whose growth rate has slowed to less than 2 per cent a year in the 1990s from rates of around 8 per cent a year in the 1960s, they will eventually mature and slow down.

Small economies can grow much faster than big ones. The real puzzle is not the tiger "miracle", but rather why there are some poor countries (such as Egypt or Turkey, Colombia, or most countries in sub-Saharan Africa) that have not managed the catch-up.

The big, industrial economies are much of a muchness. For all of them - Canada, France, Germany, Italy, the UK and US - there was a post-war golden age, the 30 glorious years from 1945. Since 1975, average growth of real national output per person has slowed in each of them. Britain has performed a bit worse than the average but almost the same as Germany in terms of growth in real GDP per head since the mid-1970s. (The German catch-up and overtaking happened earlier.)

This interesting and little-known fact is what puts paid to the politicians' boasts. If I had a pound for every time Gordon Brown has mentioned the need to increase investment to boost the sustainable growth rate or Michael Heseltine has said British competitiveness is forging ahead, it would make a handy contribution to my own prosperity; after all, higher investment or improved competitiveness certainly aren't going to do the trick quickly.

A higher rate of investment in Germany than in the UK for 25 years has not made a jot of difference to the rate at which output per head has increased. Germany has gained a bit on the investment swings, but has lost a bit on the efficiency with which its companies have used their greater amount of plant and equipment. Britain has leaner and meaner companies, if you like, but they have less to work with. It can't have hurt Germany to have had a healthier investment record, but it hasn't helped a lot either.

The fact that despite their vigorous efforts for more than a quarter of a century to alter the course of the economy the politicians have had so little effect suggests that the best they can do in terms of economic policy is avoid making mistakes. It also means that we should be sceptical about any claim to have found a miracle cure to Britain's economic problems - it will turn out to be snake oil for an imaginary complaint.

Let us give Messrs Clarke and Brown the benefit of the doubt and accept that the next government can pull off an impressive improvement in Britain's comparative economic performance - or that the last one has already done so - and Britain's long-term growth trend improves by a quarter, from about 2 per cent to 2.5 per cent a year.

This is a tall order. One way to achieve this permanently high growth trend would be for investment to start increasing more than twice as fast on average as it has during the past 20 years, by 5 per cent rather than 2 per cent a year. Another way would be to have the equivalent of a consumer boom every year, with consumer spending growing at an average rate of more than 4 per cent. We should just make the pace this year, with the help of tax cuts and the windfall of free building society shares.

This puts into context what appear to be quite modest claims about the possibility of improving growth. That extra half percentage point doesn't sound much, but it is a small fraction of a big number. But just suppose it can be done. And suppose that Germany, rather than doing a bit better than us on average, will do significantly worse and expand by only 2 per cent a year. As the average Briton starts only about two-thirds as well off as the average west German, even with this mini-economic miracle we would not catch up until the second half of the next century.

The iron laws of growth arithmetic mean that the seeds laid now would not come to fruition until our children are adults in their prime. The GDP of mature economies is so big that it can not expand at a much faster pace without unimaginably big increases in the growth rate.

This doesn't mean that there is no point in trying to improve the long- term performance of the economy. There is now a fair degree of agreement about how to avoid policy mistakes - that is why Labour and the Conservatives are speaking with one voice about keeping inflation low and reducing government borrowing, although the Government looks to have suspended its prudence for the duration of the election campaign. It is why Labour would not reverse Tory deregulation in favour of a return to interventionism.

If there is a chance of improving on not getting it wrong, the next generation will appreciate it. Of course policy-makers should strive for healthy levels of investment and greater efficiency. They should also ditch the empty slogans and come clean about how little their efforts can achieve.