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The Recovery Is Nice But We Need a Growth Agenda

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The Chancellor may feel he only needs to announce tiny symbolic policy moves, given the recovery the economy is finally enjoying. But the government has so much more to do, particularly on the "PIM" policy areas of planning, immigration and money, if he wants to improve the long-term prospects for the UK's economic wellbeing.

George Osborne's 2013 Autumn Statement - effectively a mini-budget--included more or less no significant policy changes. There were symbolic handouts to veterans, cuts in rates and announcements of faster pension age rises, but the real focus was on the UK's improving economic outlook. The treasury now expects the budget balance to go into surplus by 2018-19, and for the economy to grow 1.4% over this year as a whole - up from 0.1% last year and more than double its previous forecast of 0.6% growth. It's good that we're finally digging our way out of what has arguably been the UK's worst ever recession, but fundamentally the chancellor has not laid the groundwork for a future of sustainable growth in output and living standards.

To do so the government needs to tackle NIMBYs, the greenbelt and the homeowner lobby and let builders create the housing we need with a more liberalised planning system. It needs to rethink their misguided attacks on migrants--who boost growth and jobs, pay more in taxes than they take out in benefits, and even add to UK productivity. And it needs to give the Bank of England a new remit--requiring it to stabilise aggregate demand via a strict, rule-based system.

All three of these "PIM" policies could do wonders for UK growth in the short and long term. Houses cover only 1.14% of the UK--greenbelts cover 12.9%. Even small steps in the direction of more liberal planning laws could make a huge difference--moving the green belt out by just one mile would create space for 1m houses, according to the LSE. Economic historian Nick Crafts, looking at the building-led recovery out of the Great Depression, judged that building 2m of the houses we need over the next ten years could add 2% to GDP each year.

Liberalising immigration rules, as suggested above, is good for the UK's fiscal balance, for jobs and wages for natives, for productivity, for overseas development (potentially meaning more trade), and even tends to cut crime. On top of that, liberalising migration makes it easier for tourists to visit, and for students to come over and study. Both industries are key UK exports, worth about £19bn and £17.5bn to the economy respectively. Immigration is a growth issue.

Last but certainly not least, money--monetary policy. If the UK wants sustainable long-run growth it needs a reliable, stable macroeconomic environment. In short: it needs demand stabilisation, best achieved through a forward-looking nominal income target. Instead of looking at what inflation was over the last year, and adjusting policy accordingly, the Bank of England should adjust policy so that the market always expects it will achieve its targets going forward. Instead of relying on the monetary policy committee--who set interest rates and the money supply--to guess what has happened to supply, it should use a measure of the economy (NGDP) that automatically incorporates supply. Instead of relying on a handful of experts, the Bank should outsource information gathering to the market's best bet.

If the government stabilises aggregate demand, and liberalises aggregate supply through allowing freer movement of people and more construction then it can hope for a quicker recovery from the recession right now, and faster growth in living standards well into the future. Without significant reform of the PIM policies, the UK is at risk of another great recession, and years of income stagnation.