Causes for Weak Long-Run UK Growth

Question 1: Which of the following will be the most important constraint on UK potential output in 2023, relative to its pre-2019 trend?

Question 2: Which of the following policies would do the most to boost UK GDP in the medium term (over the next decade)?

Summary

The March 2023 CfM-CEPR survey asked the members of its UK panel to identify the most important constraint on UK potential output in 2023. Most panellists think that Brexit remains the primary drag on the UK’s potential output this year. A small fraction cites poor labour force participation as a major constraint. Several panellists suggest public investments and R&D subsidies as a solution to boost UK GDP in the medium term. Most panellists believe a combination of policies would be the most effective way to achieve this objective.

Background

The March 2023 CfM-CEPR survey asked the members of its UK panel about the constraints on UK potential output in 2023, relative to its pre-2019 trend.

Roadblocks to Recovery: Britain's Struggle to Rebound from the COVID-19 Pandemic

While the economic effects of the Covid-19 pandemic and the Ukrainian crisis have been felt globally, there is widespread consensus that the UK has been the poorest-performing G7 economy.  The OECDs Economic Outlook report in November 2022 highlighted how UK growth has lagged behind the worlds largest economies since the Covid-19 pandemic and is substantially below the OECD average. Britain is still the only G7 country yet to regain its pre-pandemic GDP levels.

This gap is unlikely to shrink anytime soon. In January 2023, the IMF forecast that Britain would be the only leading economy likely to slide into recession this year. Its 2023 forecast saw the UK as the only advanced economy to contract by 0.6%, worse even than Russias economic outlook. Similar forecasts were made by the Confederation of Business Industry, which stated that Britain runs the risk of seeing a lost decade of growth” if action isnt taken. Resolution Foundation and CEP (2022) document these and other long-run trends in the UK’s relatively weak economic performance.

A potential factor for Britain’s slow recovery is its labour market. Amongst the OECD countries, only Switzerland and Latvia have seen bigger post-Covid falls in employment than Britain. Currently, the UK is the only country in the developed world with employment rates in 2023 below their pre-pandemic levels. While unemployment rates in the UK have been on a downward trend, the overall labour force has shrunk due to a combination of factors, including long-term illness, lower migration rates, an increase in the number of students, and a rise in people taking early retirement. According to ONS figures, the number of working-age adults who are out of the labour market (economically inactive) because of long-term sickness rose from 2 million in 2019 to 2.5 million in 2022. While this rise started before the pandemic, 363,000 people have become economically inactive due to long-term sickness since the pandemic hit the UK in 2020. According to Waters and Wernham (2022), one in ten people who developed long Covid stopped working, indicating that long Covid may have played a key role in reducing the UK workforce. Additionally, according to Institute for Employment Studies (2022), economic inactivity due to caring for family and home has also risen, after three decades of sustained falls. Another big driver for the increase in economic inactivity amongst 16–64-year-olds is the rise in student numbers, with young people tending to start/stay in education instead of entering a tumultuous labour market. Furthermore, the House of Lords economic affairs committee indicated that early retirement by people in their 50s and 60s may have also been a leading cause for the rise in economic inactivity. However, Oulton (2019) argues that large increases in the labour force after 2007 reduced productivity growth in the UK relative to other comparable countries. If the opposite of this phenomenon were to also hold, then a decrease in the UK workforce could potentially have a positive effect on productivity growth, boosting Britain’s post-pandemic recovery.

The UK has also been more significantly affected by rising energy prices due to the Ukrainian crisis than other European countries. According to Ari et al. (2022), the energy crisis hit UK household budgets harder than any country in western Europe and the difference between the cost burden on poor and rich households was also far more unequal in the UK compared with other countries. With households already struggling after years of stagnant real wages, rising energy costs likely exacerbated this issue and decreased consumption in the UK, leading to lower growth. Higher energy bills have also increased the cost of doing business for UK firms, which were already facing increased volatility and change due to Brexit and Covid-19. One of the main reasons behind the UK’s higher vulnerability to global energy price hikes is the UKs heavy reliance on gas to heat homes and produce electricity, with the UK relying on gas to produce more terawatt hours of electricity in 2021 than any of the 39 European countries barring Italy. Another key difference between the UK and other European countries is the fact that UK houses are less energy efficient, forcing people to pay more for heating in the winter.

Brexit may also pose a continued drag on the UK economy. Brexit significantly increased trade costs for UK firms and decreased investment activity. Dhingra et al. (2016) investigated the potential impact of Brexit on living standards in the UK and found that Brexit led to lower per capita income across a range of possible scenarios. A recent paper by Freeman et al. (2022) disentangled the effects of COVID-19 and Brexit on UK trade and found that the implementation of the Trade and Cooperation Agreement (TCA) in 2021 led to a major disruption of UK-EU trade, with UK imports from the EU falling by 25% (relative to the rest of the world) along with a sharp drop in the number of trade relationships between UK exporters and EU importers. Using a doppelganger/counterfactual UK model, Springford (2022) estimates that in the absence of Brexit, the UK economy would have been 5.2% bigger and goods trade 13.6% higher. Furthermore, Dhingra et al. (2022) concluded that Brexit significantly disrupted UK supply chains, leading to a loss in UK trade openness and competitiveness as well as a loss in UK market share in both the EU and non-EU markets. Portes (2022) argues that this resulted in the UK largely missing out on the broad-based recovery in global trade volumes, which likely affected its post-pandemic recovery, Additionally, investment levels in the UK have significantly declined post-Brexit, contributing to the UK’s anaemic growth. The UK has ranked last amongst G7 members for investment growth since 2016, with business investment only now back to pre-coronavirus pandemic levels and the level reached at the time of the Brexit referendum in 2016. This is in sharp contrast to other leading economies like the US, where business investment rose 24% from 2016 to the fourth quarter of 2022. Springford (2022) reveals that in the second quarter of 2022, the UK shortfall in total investment due to Brexit was 13.7%. According to Haskel and Martin (2023), this has cost the UK 1.3% of its GDP in 2022, i.e., £29 billion. Moreover, research by the Peterson Institute for International Economics shows that between 2017 and 2020, average UK foreign direct investment (FDI) inflows as a share of GDP plummeted to their lowest level since the 1980s. Brexit also had a detrimental impact on the UK labour market due to a decrease in overall net immigration. Portes and Springford (2023) estimate that Brexit has led to a 1% reduction in the UK labour force, i.e., 330,000 people, primarily in low-skilled sectors. This has likely exacerbated Britain’s low labour supply post the COVID-19 pandemic, leading to a slower economic recovery.

Furthermore, several economists and think-tanks have highlighted some long-term, structural factors, predating the pandemic, which may have contributed to the UK’s stagnant growth and weak recovery. The February 2020 CfM survey (see Ilzetzki 2020) revealed that most of the leading economists surveyed by the CfM believed that low demand due to the 2008 financial crisis and subsequent austerity policies has led to a slowdown in UK productivity, even before the onset of the pandemic. In the May 2022 CfM survey (Smith and Ilzetzki 2022) the majority of the CfM panel indicated that UK-specific structural issues would lead to low growth in the coming decade. One such issue is the tendency of government policy after 2016 to flip-flop” from one idea to the next, according to Julian Jessop, a fellow at the free-market Institute of Economic Affairs. As a result, there has been a high degree of uncertainty, forcing companies to focus on staying afloat instead of building and expanding their businesses. Samiri and Millard (2022) also echoed these thoughts, characterising the constant shifts in policy as a ‘policy churn’, which make it impossible to assess the adequacy of existing policy and carry out the structural changes that can spur productivity in the long run. Other issues include the inability of governments to resolve longstanding issues plaguing the UK’s feeble productivity. The UK lags behind other European countries in important business skills and is also poorly placed in overall skills, ranking 51st between Romania and Armenia according to the Coursera Global Skills Report. Moreover, the UK still has a long tail” of companies with poor levels of output per hour worked, which neither seem to improve nor go out of business. Additionally, chronic underinvestment in public and business has also contributed to low productivity and growth in Britain in the post-2008 period, as per Samiri and Millard (2022). Minford, Gai, and Meenagh (2022) show that tax cuts and regulatory reform could boost entrepreneurship substantially and thus catalyse economic growth.

This survey contained two questions. In the first, the first asked the panellists to indicate the most important drag on UK potential GDP in their view. The second asked them for a policy that would do the most to improve UK GDP growth.

Question 1: Which of the following will be the most important constraint on UK potential output in 2023, relative to its pre-2019 trend?

Twenty-two panel members responded to this question. The panel is unified in the view that Brexit will be the most important constraint on UK potential output in 2023 (relative to its pre-2019 trend), with 57% voting for this option. Most of the remainder (30%) thinks low labour force participation will constrain UK potential output, while only one panellist thinks that oil prices and the Ukraine war will be major economic constraints on UK potential output this year.

More than half of the panel believes that the high economic costs of Brexit – lesser trade, investment, and migration – will significantly constrain UK potential output in 2023, relative to its pre-2019 trend. John Van Reenen (London School of Economics) highlights the high toll Brexit has exacted on the UK economy because of “the loss of dynamism due to lower trade.” He cites Dhingra et al. (2016), which predicted that Brexit would lower living standards and per capita income across a range of possible scenarios, and stresses that the constraints imposed by Brexit will significantly hamper the UK’s economic performance. Similar views are expressed by Costas Milas (University of Liverpool), who singles out Brexit as a major factor behind the UK’s low productivity. He states that “firms are (still) unwilling to invest [in the UK] because Brexit is holding us [Britain] back.” Łukasz Rachel (University College London) offers an alternate mechanism through which Brexit may have impacted the UK economy: political channels. He argues that Brexit has served as a “huge distraction”, diverting state attention from more pressing issues like the skills crisis, and has “kept afloat talentless politicians who lack vision and continuously mismanage the country.”

Some panellists cite poor labour participation as a major constraint on UK potential output in 2023. Martin Ellison (University of Oxford) emphasises the “weak productivity” of the “low-skilled” UK workforce, which is reflected in “low wages” and “decisions to leave the labour market.” Additionally, he suggests that the UK’s poor-quality workforce has left it “more exposed to energy prices than it should be”, as workers “lack the skills needed to upgrade the energy-efficiency of its [the UK’s] housing stock.” Moreover, James Smith (Resolution Foundation) emphasises that “it is unlikely that many of the workers leaving the labour market during the pandemic will return,” indicating that the UK’s low labour force participation problem is here to stay.

An alternate perspective on the issue is offered by Jumana Saleheen (Vanguard Asset Management), who cites the Ukraine crisis as the most critical constraint on UK potential output in 2023. She suggests that “if the war in Ukraine were to end, and oil and natural gas prices fell, this would be a positive supply side shock for the UK economy,” which could boost potential output.

David Cobham (Heriot Watt University) also views the issue through a different lens, arguing that factors like Brexit are merely a by-product of years of austerity. He claims that the underlying reason behind the UK’s low potential output is the “misguided but longstanding 'private sector positive, public sector negative' views which ignore the role of public services in creating the conditions for strong growth”, and urges economists to challenge these views, in order to reverse the UK economic downturn. 

Question 2: Which of the following policies would do the most to boost UK GDP in the medium term (over the next decade)?

Twenty-four panellists responded to this question. Around half the panel (48%) favours public investment and R&D subsidies as the remedy for the UK’s low GDP in the medium term. Most of the remaining panel (20%) believes that tax policy and policy certainty would boost UK GDP over the next decade, while a handful of panellists suggest worker retraining and boosting labour force participation as potential solutions. However, almost all panellists suggest a combination of policies would be needed to tackle this issue.

Several panellists believe that public investments and R&D subsidies are the most prudent way to boost UK GDP over the course of the next decade. Martin Ellison summarises this view: “Mature economies grow mostly through technological progress. The best returns are therefore likely to be found in policy measures that improve productivity and innovation, so my top two options are public investments and R&D subsidies or worker retraining.” Andrea Ferrero (University of Oxford) echoes this sentiment, stating: “The infrastructure in the UK is in dire condition and innovation could certainly provide a productivity boost.” David Cobham further suggests that public investments and R&D would “improve transport and communications, labour skills, labour force participation and the business environment more generally”, paving the way for “higher and more productive business investment.” John Van Reenen substantiates this viewpoint by citing Teichgraeber and Reenen (2022), which provides evidence on the efficacy of different research and innovation (R&I) policies in boosting productivity growth in various countries.

However, most panellists suggest that a range of policies is needed to resolve this issue, and thus, indicate that all the above options could potentially boost UK GDP in the medium term. Ricardo Reis (London School of Economics) sums up this viewpoint: “[It’s] hard to pick one [policy], most of them are needed.” Morten Ravn (University College London) further elaborates on this, stating “there is a need to invest in skills and infrastructure but short to medium run returns on such investments are probably low to modest”. He suggests that worker retraining is a similar solution –“much needed”, but unlikely to bring about “a large short-to-medium run boost to the economy.” He offers a potential solution in the form of boosting labour force participation but mentions certain obstacles to its efficacy such as low unemployment rates, stagnant real wages, and selection effects in labour market dropouts. While repairing public finances is unlikely to boost GDP in the short run, he suggests a potential panacea for the UK economy: re-entering the EU single market. Such a move could "boost public finances and the economy”, as per Ravn.

References

Ari, A., Arregui, N., Black, S., Celasun, O., M Iakova, D., Mineshima, A., Mylonas, V., W.H Parry, I., Teodoru, I. and Zhunussova, K. (2022). Surging Energy Prices in Europe in the Aftermath of the War: How to Support the Vulnerable and Speed up the Transition Away from Fossil Fuels. [online] IMF. Available at: https://www.imf.org/en/Publications/WP/Issues/2022/07/28/Surging-Energy-....

Dhingra, S., Fry, E., Hale, S. and Jia, N. (2022). The Big Brexit An assessment of the scale of change to come from Brexit. [online] Available at: https://www.resolutionfoundation.org/app/uploads/2022/06/The-Big-Brexit_.pdf.

Dhingra, S., Ottaviano, G., Sampson, T. and Van Reenen, J. (2016). The consequences of Brexit for UK trade and living standards. [online] Available at: http://cep.lse.ac.uk/pubs/download/brexit02.pdf.

Freeman, R., Manova, K., Prayer, T. and Sampson, T. (2022). Unravelling deep integration: UK trade in the wake of Brexit. [online] Available at: https://cep.lse.ac.uk/pubs/download/dp1847.pdf.

Gourinchas, P.-O. (2023). Global Economy to Slow Further Amid Signs of Resilience and China Re-opening. [online] IMF. Available at: https://www.imf.org/en/Blogs/Articles/2023/01/30/global-economy-to-slow-....

Haskel, J. and Martin, J. (2023). How has Brexit affected business investment in the UK? [online] Economics Observatory. Available at: https://www.economicsobservatory.com/how-has-brexit-affected-business-investment-in-the-uk.

Ilzetzki, E. (2020). Explaining the UK’s productivity slowdown: Views of leading economists. [online] CEPR. Available at: https://cepr.org/voxeu/columns/explaining-uks-productivity-slowdown-views-leading-economists.

Institute for Employment Studies (2022). Institute for Employment Studies. [online] Available at: https://www.employment-studies.co.uk/system/files/resources/files/IES%20... [Accessed 17 Mar. 2023].

Minford, A. Patrick and Zheyi Zhu (2023) “How the short run effects of Brexit on trade, investment and GDP have been miscalculated in some recent work,” mimeo, Cardiff University.

Minford, A. Patrick, Yue Gai, and David Meenagh (2022) “North and South: A Regional Model of the UK,” Open Economies Review, vol. 33, issue 3, No 7, 565-616

Office for Budgetary Responsibility (2023). Economic and fiscal outlook - March 2023. [online] Office for Budget Responsibility. Available at: https://obr.uk/efo/economic-and-fiscal-outlook-march-2023/#chapter-1.

Organization for Economic Cooperation and Development (2022). Home. [online] www.oecd-ilibrary.org. Available at: https://www.oecd-ilibrary.org/sites/f6da2159-en/index.html?itemId=/content/publication/f6da2159-en.

Oulton, N. (2019). “The UK and Western productivity puzzle: does Arthur Lewis hold the key?” International Productivity Monitor, Number 36, Spring, pp. 110-141.

Portes, J. (2022). Trade, migration, and Brexit. [online] CEPR. Available at: https://cepr.org/voxeu/columns/trade-migration-and-brexit.

Portes, J. and Springford, J. (2023). Early impacts of the post-Brexit immigration system on the UK labour market [online] CER Insight. Available at: https://www.cer.eu/sites/default/files/insight_JS_JP_17.1.23.pdf.

Reenen, J.V., Sampson, T., Huang, H., Ottaviano, G. and Dhingra, S. (2016). The consequences of Brexit for UK trade and living standards. [online] CEPR. Available at: https://cepr.org/voxeu/columns/consequences-brexit-uk-trade-and-living-standards.

Resolution Foundation and Centre for Economic Performance, LSE, (2022) “Stagnation nation: Navigating a route to a fairer and more prosperous Britain”.

Samiri, I. and Millard, S. (2022). Why is UK Productivity Low and How Can It Improve? [online] NIESR. Available at: https://www.niesr.ac.uk/blog/why-uk-productivity-low-and-how-can-it-improve.

Smith, J. and Ilzetzki, E. (2022). Prospects for UK economic growth. [online] CEPR. Available at: https://cepr.org/voxeu/columns/prospects-uk-economic-growth [Accessed 14 Apr. 2023].

Springford, J. (2022). What can we know about the cost of Brexit so far? [online] Available at: https://www.cer.eu/sites/default/files/pbrief_costofbrexit_8.6.22_0.pdf.

Teichgraeber, A. and Reenen, J.V. (2022). A policy toolkit to increase research and innovation in the European Union. CEP Discussion Papers. [online] Available at: https://ideas.repec.org/p/cep/cepdps/dp1832.html [Accessed 3 Apr. 2023].

Waters, T. and Wernham, T. (2022). Long COVID and the labour market. [online] Institute for Fiscal Studies. Available at: https://ifs.org.uk/publications/long-covid-and-labour-market [Accessed 17 Mar. 2023].

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How the experts responded

Question 1

Participant Answer Confidence level Comment
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research N/A or Other Very confident
Given that potential output is a latent variable and therefore almost impossible to guage, I find it practically unreasonable to pin down any one factor with any degree of uncertainty. Rather than the none of the above maxim (NOTA), I would be inclined to the all of the above (AOTA). The underperformance of the UK economy relative to its historical trend and against its main trading partners represents an historic and devastating pronouncement on policy choices over the past quarter of a century. In part potential has been impaired but so has performance relative to that potential.
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Brexit Not confident
Michael McMahon's picture Michael McMahon University of Oxford Brexit Confident
I think in recent years, I think that Brexit has been the dominant cause of macroeconomic weakness in the UK. Of course, before 2016 the UK had already shifted to a much lower growth than in the pre-GFC period which has nothing to do with Brexit. I think there are two important considerations in that period. One is the extent to which GDP growth before the financial crisis was potentially artificially high by the easy credit conditions created in response to firms using financial engineering to exploit explicit or implicit government support (as in Malherbe and McMahon, 2022). The other relates to the effect of austerity on provision of public services, and the low level of public investment. I am not aware of a large body of research on these questions so I am somewhat more uncertain about the strength of this second effect. (There is some research on this - one related to public capital stock is Lynde and Richmond, 1993).
Ricardo Reis's picture Ricardo Reis London School of Economics N/A or Other Confident
All of the options, and I do not have the tools and confidence to quantify their relative contribution with precision.
Sir Charles Bean's picture Sir Charles Bean London School of Economics Labor force participation Confident
James Smith's picture James Smith Head of Macroeconomic Policy, Resolution Foundation Labor force participation Confident
With inactivity still nearly 500k above pre-pandemic levels this has been the biggest hit to UK potential since the pandemic. Still a big question about what will happen to participation going forward and the role of policy. For my money, the Bank of England's forecast of continued falls in participation look too gloomy - certainly relative to recent data - and there are reasons for thinking policy can shift the dial even if it is unlikely that many of the workers leaving the labour market during the pandemic will return.
Martin Ellison's picture Martin Ellison University of Oxford Labor force participation Confident
The UK is in the middle of a perfect storm, although a lot of it is of our own making. On potential output in 2023, we will be constrained by all of labour market participation, oil and energy prices, Brexit, policy uncertainty and workforce skills. It’s difficult to identify one most important factor, but for me the lack of workforce skills dominates as it is an important driver of the other factors too. The weak productivity of a low-skilled workforce is reflected in low wages, which directly impacts on decisions to leave the labour market. The UK also lacks the labour market skills needed to upgraded the energy-efficiency of its housing stock, so we are more exposed to energy prices than we should be, even setting aside the limited political appetite to support home improvements.
Roger Farmer's picture Roger Farmer University of Warwick Labor force participation Not confident
First I would note that ‘potential output’ cannot be defined in the absence of a heavy dose of economic theory. Second, there is no unique reason why this constructed concept is lower in the UK than in other countries: all of the reasons mentioned here have some role to play. Finally, potential output is not the same as output per worker which is also lower in the UK than many other countries and it is the fall in output per worker that is the more worrying statistic.
David Cobham's picture David Cobham Heriot Watt University Brexit Confident
Brexit relative to the pre-2019 trend. But it is important to recognise that that miserable trend was heavily the result of years of austerity, which of course largely continue to this day (and Brexit can be argued to be in part a result of that austerity). What we see today is the result of misguided but longstanding 'private sector positive, public sector negative' views which ignore the role of public services, from education to health to infrastructure, in creating the conditions for strong growth. We economists should do more to challenge those views, and to reverse that miserable trend.
Alessandra Bonfiglioli's picture Alessandra Bonf... Queen Mary University of London Brexit Confident
Paul De Grauwe's picture Paul De Grauwe London School of Economics Brexit Very confident
Vincent Sterk University College London Brexit Confident
Stephen Millard's picture Stephen Millard National Institute of Economic and Social Research Labor force participation Confident
All of the options will matter for 2023 to some degree. In the longer run, (hopefully) the war will end and people will return to the labour force, leaving policy uncertainty, Brexit and workforce skills the most important issues holding back UK growth.
Gino A. Gancia's picture Gino A. Gancia Queen Mary University of London Brexit Extremely confident
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Labor force participation Not confident
Vacancy rates are very high as a result of falling participation rates. All are clearly relevant but oil prices, Brexit and tax policy will probably have shorter-term effects
Andrea Ferrero's picture Andrea Ferrero University of Oxford Brexit Confident
The UK shares similar exposure to all factors listed in the question (which are surely important) with many other countries around the world. Brexit is the truly unique drag to the UK economy. I always thought that the negative consequences of Brexit would materialize in the medium/long run. In addition, at the moment, the costs of Brexit are interacting with other temporary factors, such as the disruption of global supply chains and the consequences of the Russian invasion of Ukraine.
Jumana Saleheen's picture Jumana Saleheen Vanguard Asset Management Oil prices and Ukraine war Very confident
In the short run, boosting potential output is hard. But if the war in Ukraine were to end, and oil and natural gas prices fell, this would be a positive supply side shock for the UK economy.
Łukasz Rachel's picture Łukasz Rachel UCL Brexit Confident
The large direct effects of Brexit on trade in goods and services, on investment, and on migration are well documented. On top of that Brexit has had two important - though not quantified, or perhaps quantifiable - economic effects through political channels: first, it has served as a huge distraction, essentially focusing the entire state away from solving pressing problems, not least consequences of a decade austerity or the skills crisis; second and relatedly, it has kept afloat talentless politicians who lack vision and continuously mismanage the country.
Natalie Chen's picture Natalie Chen University of Warwick Brexit Confident
John VanReenen's picture John VanReenen London School of Economics Brexit Very confident
The costs of Brexit will be (and are) greater than many think because of the loss of dynamism due to lower trade. We predicted all this pre-recession https://cep.lse.ac.uk/_new/NEWS/abstract.asp?index=5850. (The Minford view that de-regulation and low taxes would tranform UK is sheer fantasy.)
Lucio Sarno's picture Lucio Sarno Cambridge University Brexit Very confident
Linda Yueh's picture Linda Yueh London Business School Labor force participation Confident
Costas Milas's picture Costas Milas University of Liverpool Brexit Confident
In my view, the main issue here is weak productivity. UK productivity lags well behind that of the remaining G7 economies. According to the OECD (https://data.oecd.org/lprdty/gdp-per-hour-worked.htm), output per hour worked in the UK is below that of the remaining G7 economies. At the same time, however, UK productivity is the seventh weakest among more than thirty OECD economies. So why is UK productivity so weak? The reason is (lack of) business investment. Business investment in the UK. Firms are (still) unwilling to invest because Brexit is holding us back. The fact that Britain's politicians (both Conservative and (less so) Labour ones) do not (?) realize Brexit's damage on the economy adds to their credibility problem which makes both domestic and international investors hesitant to invest. This, in turn, undermines UK's productivity prospects and, consequently, the country's economic growth prospects.

Question 2

Participant Answer Confidence level Comment
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research N/A or Other Very confident
We need a consistent and stable set of policy initatives that live beyond the Parliamentary cycle. This would involve institutions that plan and deliver over the long run and for the whole country. A foundational step would be to create a consensus for policies that will involve greater and better directed levels of public investment, alongside a more stable environment for business investment in each sector and region, as well as devolved nations. Such an approach would represent a fundamental break with the incremental and market-dominance approaches of the past 25 years.
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Worker retraining Not confident
Michael McMahon's picture Michael McMahon University of Oxford Public investments and R&D subsidies Confident
This follows from the last part of my last answer.
Ricardo Reis's picture Ricardo Reis London School of Economics Tax policy and improved policy certainty Confident
Hard to pick one, most of them are needed.
Sir Charles Bean's picture Sir Charles Bean London School of Economics Worker retraining Confident
James Smith's picture James Smith Head of Macroeconomic Policy, Resolution Foundation Boosting labour force participation Not confident
I think the biggest single area for policy to boost growth is probably on the labour-market side. But my general view is that the fall in growth since the financial crisis (that, for me, is the turning point) has become entrenched with firms, households and policy makers all now pessimistic about the future. The big challenge for policy makers will be to shift the dial on that. Supply side headwinds are definitely a factor in that, particularly post pandemic when we have had a series of very negative supply shocks, but there will be a need for a range of policies to be used to get future growth up.
Martin Ellison's picture Martin Ellison University of Oxford Public investments and R&D subsidies Confident
Every first year undergraduate is taught that mature economies grow mostly through technological progress. The best returns are therefore likely to be found in policy measures that improve productivity and innovation, so my top two options are public investments and R&D subsidies or worker retraining. Boosting labour market participation may work in the short run but is a “sticking plaster” solution that misses the steady decline in UK productivity experienced over the last decade or so. If people have genuinely left the labour market because of long-covid health problems then that is a sunk cost to which we must adjust – the answer is not to try and entice such people back into the labour market.
Roger Farmer's picture Roger Farmer University of Warwick Tax policy and improved policy certainty Not confident
Once again, all of the policies mentioned here have a role to play. But each of those policies can have both harmful or beneficial effects depending on how they are implemented.
David Cobham's picture David Cobham Heriot Watt University N/A or Other Confident
What government can and should provide is a combination of public investments – in physical infrastructure, social infrastructure (education and health), R&D – which will improve transport and communications, labour skills, labour force participation and the business environment more generally, and so open the way for higher and more productive business investment. In addition, the UK needs a combination of tax changes and minimum wage increases which will make a serious mark on the glaring inequalities across regions and social groups, give the currently poorer regions and groups a greater stake in society and allow scope for their creativity and contributions.
Alessandra Bonfiglioli's picture Alessandra Bonf... Queen Mary University of London Public investments and R&D subsidies Confident
Paul De Grauwe's picture Paul De Grauwe London School of Economics Public investments and R&D subsidies Confident
Vincent Sterk University College London Tax policy and improved policy certainty Confident
I think policy certainty is a major factor, as is worker skills.
Stephen Millard's picture Stephen Millard National Institute of Economic and Social Research Public investments and R&D subsidies Confident
I think the answer here is really 'all of the above'. It's not clear that one policy on its own will be enough to improve our growth prospects: there is no 'silver bullet'. Rather, it will be important to enact a set of policies addressing all of the different problems discussed in the above text.
Gino A. Gancia's picture Gino A. Gancia Queen Mary University of London N/A or Other Extremely confident
Put the right people in the right places and start to face reality.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York N/A or Other Not confident
The key to boosting GDP in the medium term is higher private investment. This could be helped by tax policy and stable future expectations of policy and world growth. We may have to live with lower labour participation and so require labour-saving investment and a more skilled labour force with better education.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Tax policy and improved policy certainty Confident
Andrea Ferrero's picture Andrea Ferrero University of Oxford Public investments and R&D subsidies Not confident
All policies listed in the question seem rather important. I've chosen public investment and R&D subsidies because the infrastructure in the UK is in dire conditions and innovation could certainly provide a productivity boost. Policy certainty could also help a lot, especially if something could be done to mitigate the costs of Brexit.
Jumana Saleheen's picture Jumana Saleheen Vanguard Asset Management Public investments and R&D subsidies Very confident
In theory boosting labour productivity is the single most important way to boost GDP in the medium run. To boost labour productivity we do need to see bold policies and investment (both public and private sector). Investment should cover investment in workers, capital and R&D. Bold policies should be designed to improve labour mobility across the county.
Łukasz Rachel's picture Łukasz Rachel UCL Public investments and R&D subsidies Confident
The country should invest in itself (it badly needs public investment across the board) and build on its comparative advantage. Worker retraining and brining communities back into the economic fold should be a part of this.
Natalie Chen's picture Natalie Chen University of Warwick Public investments and R&D subsidies Confident
John VanReenen's picture John VanReenen London School of Economics Public investments and R&D subsidies Very confident
See the evidence form my innovation policy toolkit (aka the 'Lightbulb Table') https://cep.lse.ac.uk/pubs/download/dp1832.pdf
Lucio Sarno's picture Lucio Sarno Cambridge University Tax policy and improved policy certainty Confident
Morten Ravn's picture Morten Ravn University College London N/A or Other Confident
Supply side reforms are tempting but hard to implement given the state of public finances. There is a need to invest in skills and infrastructure but short to medium run returns on such investments are probably low to modest (and it would be wrong to not focus on longer term returns when selecting such projects). Worker retraining, again, might be needed, but should not expected to bring about a large short to medium run boost to the economy. Boosting labor market participation may be more promising, but unemployment is already low, real wages have stagnated in the UK for decades now, and there is probably important selection effects in labor market dropouts. Repairing public finances will not bring about a boost in the short term. There is some low hanging fruit though: Reentering the EU single market. This would boost public finances and the economy.
Linda Yueh's picture Linda Yueh London Business School Public investments and R&D subsidies Confident
Costas Milas's picture Costas Milas University of Liverpool Public investments and R&D subsidies Confident