Autumn 2024 Newsletter

Economics

Regaining competitiveness, going for growth Perhaps the biggest policy challenge for the new Labour government is to raise productivity and hence economic growth. This would make addressing all the challenges we face so much easier. In 2000 the US was 11% more productive than the UK, by 2023 this gap had widened to 23%. On current trajectories this gap will continue to widen. How can we at least keep up? The UK might no longer be part of the EU, but Mario Draghi’s report into the EU’s economic challenges and how to address them is worth a read as many of his insights and recommendations will hold for the UK as well. Mr Draghi urges a step change in investment in technologies and the green transition to keep up with the USA and China. Governments should play a big role in that.

Data centres and the green transition The US economic outperformance largely reflects its thriving tech sector and its latest moves into Generative AI. In our 2023-24 Winter Newsletter we discussed the potential impact on productivity but what about the environment? The energy needs of data centres are staggering. According to the International Energy Agency, the additional electricity demand from new data centres, cryptocurrencies and artificial intelligence between 2022 and 2026 alone could be equivalent to the total current electricity consumption of Germany, the world’s third largest economy. Where would that electricity come from in a sustainable way and would our grids be able to cope?

New fiscal rules to help deliver the government’s agenda? How to pay for the step change in public investment while faced with a rapidly ageing population, climate change and heightened geopolitical tensions without piling on ever more debt? In the absence of any policy changes, the OBR’s latest Fiscal risks and sustainability report shows that UK government debt could rise to 130% of GDP by mid-century and close to 300% by the 2070s. A number of leading economists have urged the UK government to change the fiscal rules to boost public investment (paywall). Previous Labour governments famously had their golden and sustainable investment rules to guide fiscal policy, with the government only allowed to borrow to invest. Clearly the challenges are bigger now: back then public-sector net debt was less than 40% of GDP, this August it reached 100% of GDP. Still, can we learn from past experiences?

Can we raise more revenue in a fair and efficient way? Bringing down debt as a share of GDP in the absence of strong growth while boosting investment without relying on another bout of deeply unpopular austerity seems like an impossible task. Chancellor Rachel Reeves first Budget is coming up in late October. It is perhaps not surprising then that tax rises are under discussion – see the Institute of Fiscal Studies for a good discussion of options for increasing taxes. Could another look at the past help here too? Back in 2010, the Mirrless Review, named after the late Nobel laureate Sir James Mirrless, identified the characteristics of a good tax system for any open developed economy and offered recommendations for UK policymakers. Perhaps it is time to revisit this seminal review?

Good policy design – the need for economic appraisal and evaluation Learning from the past requires understanding which policies worked, which didn’t, and why. Good policy design requires evaluation, as the government stresses. Economicsense is pleased to announce the launch of a new course Introduction to Evaluation as part of the SPE Courses programme. The course will cover key types of evaluation and is ideal both for those doing evaluation and those commissioning it.

Dynamic or static If you are an Oasis fan upset by so-called ‘dynamic pricing’ for their reunion tickets you will be pleased to know that the Competition and Markets authority have opened an investigation into the sales and whether the law was broken. Dynamic pricing, where prices change real time in response to demand and supply, is used in several markets and can be useful. Some may say it’s not so great for music gigs where supply is usually fixed.

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