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An excellent article by the FT's Economics Editor, Chris Giles, published today should be required reading for our political classes. It implies tough questions for both Labour and the Government.

An excellent article by the FT's Economics Editor, Chris Giles, published today should be required reading for our political classes. It implies tough questions for both Labour and the Government.

 The piece is behind the FT paywall, so I'll summarise. Giles argues that the real problem facing the UK economy today is weak productivity not cuts. If Osborne's plan was really causing a collapse in demand, one would expect to see inflation falling, unemployment spiking and tax revenues declining.  In fact, we see none of these things.

 Giles argues that the economy is troubled not by withdrawal of government spending but by rising oil and commodity prices and the damage this is doing to everybody's purchasing power.  Nothing the Government or the Bank of England can do with fiscal or monetary policy, Giles argues, will control these rising prices.  The only solution is for UK companies to become more productive - basically to make and do things more cheaply to offset the effect of higher costs.  The problem is the productivity of UK firms has stalled over the last two years.

 I wrote previously about how shallow the current political debate on the economy now is.  But the implication of Giles's argument is even more radical. It suggests that our leaders are embroiled in an irrelevant debate.  Even if we followed Ed Balls's advice (repeated today) to resurrect Alistair Darling's fiscal plan it would not make any impact on the productivity problem. Indeed by focusing so heavily on the deficit reduction strategy as the source of our problems, Balls is distracting attention away from the real cause and hence the possibility of a solution.

But if Balls is misdirecting public opinion, he has a willing accomplice in Osborne who, in his different way, is also keen to make the fiscal situation the main dividing line with Labour and to argue that his austerity package is the best route to economic well-being. In fact, Osborne's Mansion House speech last night was a classic of his genre combining tough talk on the deficit with a breezy optimism about the UK's medium-term prospects. Productivity was not mentioned once.

Some may argue that there is little the Government can do about the productivity of companies, so this would be a pointless discussion for politicians to have anyway.  But it is difficult to draw such firm conclusions because, as the Bank of England's Deputy Governor admitted (PDF) a few weeks ago, we really have no idea why productivity has stalled. 

This does suggest that, at the very least, we need a public debate about productivity buttressed by the investigative work of economists and others. But the chances of that happening while politicians feel more comfortable shadow boxing around the deficit seem small.

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