If Gordon Brown’s rhetoric were the only yardstick, Britain would always appear to be outshining other major economies. The chancellor relishes comparing the UK favourably to its rivals – mainly in relation to the Eurozone. If the UK’s international performance lags, it usually does so against the US, the world’s most dynamic economy.
But carefully selected statistics do not necessarily tell the whole story. On Wednesday Mr Brown boasted that 10 years ago the UK had languished at the bottom of the group of seven leading economies in terms of national income per head but it was now second only to the US.
However Britain still lags behind many other European countries and the US in terms of productivity growth. For example, economic output per worker is much higher in France than in the UK, but French unemployment is twice that of the UK. The main reason is that unemployment has come down sharply from 7.7 per cent on the International Labour Force measure to 5.6 per cent today.
Peter Spencer, economic adviser to Ernst & Young’s Item Club, said: “It is wrong just to look at gross domestic product per head without looking at the longer working week and year in Britain and the fact that we all work much later in life as well.”
Ben Broadbent of Goldman Sachs added: “The fall in UK unemployment has been partly cyclical, mainly structural for which previous administrations deserve at least some of the credit. Arguably growth should be higher, given the acceleration in labour supply but a lot of that increase in labour supply appears to have gone into structural unemployment rather than output.”
Although there have been some signs of improvement in productivity growth, the gap with other countries is still large.
Anne-Marie Brook, head of the UK desk at the Paris-based Organisation for Co-Operation and Development, said the UK did very well against other major economies in terms of its stability and resilience but not on productivity. “The UK is not near the top of the group of seven industrialised countries when it comes to productivity. It is narrowing the productivity gap with most European countries but the gap is widening with the US,” she said.
This year, for the first time in time in 15 years, the Paris-based think-tank, does not expect the UK economy to outperform that of the Eurozone. Its projection of 2.6 per cent growth for both areas this year encompasses above-trend growth in the eurozone but trend growth - the long-term rate consistent with stable inflation - in the UK.
The OECD expects eurozone growth to slow next year closer to 2.2 per cent against unchanged growth of 2.6 per cent in the UK. Despite the acceleration in growth this year, the UK will still underperform the OECD average for the second consecutive year although the OECD expects this situation to reverse in the next two years.
On the public finances, Mr Brown once again raised his borrowing forecasts for the next five years, albeit modestly, mainly due to lower than expected tax revenues and higher spending.
His position contrasts unfavourably with much of continental Europe. The European Commission said last month it expected average eurozone public borrowing to be 1.7 per cent of GDP in 2006 after adjusting for the economic cycle, compared with its spring forecast of 2.1 per cent. The improvement was due to “strong and higher than previously expected inflow of tax revenues”. In contrast, the EC left unchanged its forecast for the UK of 2.7 per cent of GDP.
For 2007, the Commission expects eurozone structural borrowing of 1.2 per cent of GDP, compared with 1.9 per cent in the spring. But it saw the UK improving only slightly from 2.7 per cent to 2.6 per cent.
If the Commission’s forecasts materialise, Britain’s structural position on public borrowing will be one of the worst in the EU in 2007, with only Hungary, Slovakia, the Czech Republic, Greece and Portugal borrowing more.
That could challenge even Mr Brown’s capacity to put a positive gloss on things.
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