We have got the message. Liz Truss, Britain’s new prime minister, is all about growth in gross domestic product. “I have three priorities for our economy: growth, growth and growth,” she said in her conference speech last week. She implied the negative market reaction to her chancellor’s “mini” Budget — which made the pound fall and mortgage rates surge — would be worth it. “As the last few weeks have shown, it will be difficult,” she said. “Whenever there is change, there is disruption. And not everyone will be in favour of change. But everyone will benefit from the result.”
There are two problems with this strategy. The first is that most people don’t know what GDP growth is, let alone care about it. Nobody is standing outside Downing Street with a megaphone chanting “What do we want? 2.5 per cent annual GDP growth. When do we want it? Over the medium term.”
In a study of the public’s understanding of economics funded by the Office for National Statistics in 2020, GDP was one of the economic concepts people understood the least. Less than half the British public were able to correctly identify the definition of GDP from a list of options. It was common for people to confuse it with the value of exports or the pound.
In focus groups, people didn’t know what sort of economic growth rate would be considered normal, good or bad. When told growth had been 1.3 per cent, the most common reaction was silence or indifference. “It means absolutely nothing to me,” one participant said. “It’s not tangible for us, we can’t touch or feel it,” said another. “You’re sort of in your own bubble, aren’t you? Just worrying about what you’ve got . . . your own economy.”
Truss isn’t the first self-confessed “economics geek” in politics. Gordon Brown was once ridiculed as shadow chancellor for mentioning “post-neoclassical endogenous growth theory” in a speech. And to be fair to Truss, she does at least realise that people need some help to understand why growth matters. In her speech, she explained that growth would mean higher wages, more jobs, more money to fund public services, and so on. But if you have to spend seven sentences explaining what your slogan means, it might not have been the best choice in the first place.
That is not to say the public is ignorant about the economy or indifferent to it. The study found “pockets of public economic expertise” in which people were very well-informed, often in areas they felt were most relevant to their everyday lives. Interest rates were one measure people understood and followed closely, unsurprisingly given the impact on mortgage rates and consumer credit. “We live by the interest rate. If the interest rate goes up, then your life quality goes down,” one focus group participant said. People understood inflation pretty well too, and often drew the link unprompted to whether or not it had outstripped wage growth. When asked how they judged if the economy was doing well, people tended to mention interest rates, the availability of decent jobs, the high street, the cost of living and the quality of public services.
That brings us to the second problem for Truss. While she and her chancellor Kwasi Kwarteng did act to protect households from surging energy bills, the market reaction to their unfunded tax cuts affected things like mortgage rates that really matter to people. The “mini” Budget worsened the parts of the economy that people understand and care about, in pursuit of a target people don’t understand and don’t care about.
This is not just bad politics. It is also bad economics. I am not in the “anti-growth coalition”. Of course faster economic growth would be a good thing. But it is not helpful to kick off an attempt to boost the economy with a shock that makes people feel poorer and more anxious. Many already view the economy as something external, unpredictable and dangerous. In the study, members of the public talked about it as a threat “constantly hanging over us”; others said they had been “hit” or “smacked in the face” by it.
The language of “disruption” works fine in the world of start-ups. It doesn’t work in the world of economics, which is really just the world of people’s real lives. There were no easy options facing Truss and Kwarteng, but the fallout from their “mini” Budget has only made their task harder.
If the UK economy is to grow faster, people will need to be more willing to invest, to start businesses, to train in something new, to make a move in pursuit of an opportunity. People don’t want to be disrupted. They take risks when they’re not afraid.
sarah.oconnor@ft.com
Source: Economy - ft.com
