For the UK, the position looks particularly serious. Stagnant productivity since
the financial crisis has left the economy effectively unable to drive growth from
within. The OBR now estimates that the UK’s ‘output gap’ – the amount by which an
economy can grow in a year without causing inflation – has turned positive for the
first time since 2008, meaning that there is little slack in the economy to take up
any increase in demand.140 If fear of inflation now prevents further stimulus, there
is a real risk that the UK’s ‘lost decade’ of growth will become permanent, and GDP
will never catch up with its pre-financial crisis trend.141
It is hard to avoid the conclusion that we need a new approach. With interest rates
still at record lows, the case for public investment to drive demand is particularly
strong. Borrowing for public investment is not the same as borrowing for current
consumption: investment (assuming it is well made) generates long-term growth.
We don’t have an output gap any more so therefore we should stimulate the economy with public borrowing and spending.
By stimulating demand, public sector investment
can ‘crowd in’ finance from the private sector.
Yep, when there’s no output gap and we’re at full employment.