Bloomberg View Editorial Board
George Osborne, Britain’s chancellor of the exchequer, depressed both his currency and his countrymen last week with a downer of speech that blamed “a dangerous cocktail of new threats from around the world” for a considerably gloomier economic outlook than the one he delivered less than two months ago.
He’s not wrong about the state of the world. But he would have done better to focus more on what Britain can do to strengthen its own economy. For all its post-crisis rhetoric about the need for austerity and budget-balancing, the government has done too little to prepare the British economy for tougher times.
Its most exciting initiative is the so-called Northern Powerhouse, designed to encourage growth in the north of the country through investment and a “devolution revolution” away from London. But much of the extra money (or power, for that matter) has yet to materialize. On measures from GDP per capita to health and education outcomes, Britain’s northeast lags the rest of the country.
Osborne also filled in some details about a new commission on infrastructure, which is scheduled to deliver a report in March. He is correct to re-emphasize the benefits of more infrastructure spending, but it’s not as if this is a new idea. The question is how much to spend, and the answer is pretty straightforward: as much as Britain can afford.
The chancellor is also right to warn against complacency. The British economy is doing better than Europe’s, in no small part because it is open and flexible. There is a reason why so many migrants from around Europe and beyond want to settle there.
That said, there are signs the British economy is not quite as robust as many think – or as the chancellor has claimed. The economy grew 2.1 percent year-on-year in the third quarter of 2015, lower than forecast. Per capita GDP has barely recovered to its pre-crisis level. Productivity remains stubbornly low. Its spending on research and development remains low compared with that of its major trading partners. And key areas of advanced manufacturing, such as aerospace and pharmaceuticals – areas the government would like to see grow – require high levels of R&D.
Britain’s economy cannot help but catch a chill when the global winds blow colder. Yet all the pressures Osborne cited in his speech – turmoil in China, tensions in the Middle East, low commodity prices – were well-known last fall, when he and other government officials were declaring the economy in good health.
In the wake of the financial crisis, there was much official talk about “rebalancing” the economy – relying less on consumption and debt and more on investment. If the economy remains unbalanced, the government has mainly itself to blame.
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