Slow-growing unproductive Britain is a thing of the past but economic indicators suggest its dynamic replacement is set to have a short life
For anyone who grew up with the clichÃ© that Britain is the sick man of Europe, the latest International Monetary Fund estimates of how much countries earn per citizen will confirm how out of date that view is.
For the past three years British gross domestic product per capita has been higher than Italy's, France's and Germany's. If Germany was Europe's miracle economy in the 1950s and 1960s, Britain is the miracle economy of the current era.
For all that, the performance of the UK economy is deceptive.
Like a pauper wearing a rented tuxedo, the surface impression is good; what's underneath is worrying though.
The UK economy is coasting on the hard-won achievements of the 1980s and 1990s, while these foundations are being slowly eroded by higher taxes, more regulation and damaging trade and budget deficits.
Why? Because the Labour Government that came to power in 1997 has been gradually reversing the economic policies that led to Britain's economic miracle.
Some City economists think the end of the miracle has already come. 'New Labour's economic policies are simply a stealth version of Old Labour's, and will do as much collateral damage,' says David Smith, chief economist with the London stockbroker Williams de BroÃ«, a subsidiary of ING Groep NV. 'Private investment and productivity growth are both collapsing.'
Smith estimates that in the past two decades, Britain's output grew by 67% in real terms, a trend rate of 2.6% a year.
For the next two decades, he is forecasting growth of 42%, or just 1.8% a year. The reason? 'The damage Labour has done to the supply side,' he says.
How realistic is that bleak assessment?
There has been a sharp change in economic policy in the past year. After sticking to Conservative Party spending plans during Labour's first term, Chancellor of the Exchequer Gordon Brown has embarked on a massive increase in public spending.
As a recent research report from right-of-centre think-tank the Adam Smith Institute pointed out, Britain and Portugal are the only European countries where taxes have gone up in the past five years (and Britain's have gone up more).
Of the G7 industrial nations, only Japan has put up taxes more than Britain. In the rest of the world, governments have been pushing taxes down.
Not only is the Government spending and taxing more, it is failing to pay its way. Last week, the UK's National Institute of Economic & Social Research predicted that 'new measures are required to raise an additional £20bn of tax revenue by 2006.''
In effect, Brown has not only pushed up his spending, he has also got his sums wrong about how to pay for it. Now he will have to put up taxes further.
The trade deficit has been rising substantially and is now running at 2.1% of GDP. Among the G7 economies only the US has a bigger deficit. If the UK is so successful, shouldn't it be selling more abroad, and importing less?
And business investment has been collapsing. In September, the Government reported that business investment was running at its lowest level in four years. Economies that stop investing eventually stop growing.
At the micro-level, the picture is gloomier. The IMF calculates that British productivity this year will fall by 0.5%, the worst performance in the G7 (and next year it will be bottom of the pile as well).
Meanwhile, unit labour costs are rising faster than in any other G7 nation and the Government is about to impose a tax rise on employers. Don't economies where people produce less and pay themselves more eventually get poorer?
One reason for dismal productivity might be that Gordon Brown likes businesses to be busy doing things for him, not their customers. The Government has leaned toward making companies instruments of social policy rather than wealth creation. For example, the new system of tax credits means every employer has become a mini-welfare agency.
The British Chamber of Commerce estimates that the extra cost of regulation imposed on companies since 1997 is £15bn.
True, the surface does look fine. Growth in the latest quarter was 0.7%. Economists forecast the UK will grow 1.7% in 2002, marking 10 years of unbroken economic expansion. Unemployment is very low by Continental European standards, at just 5.5%. Another 6% of British workers, though, now get incapacity benefit. Cynics might wonder if the unemployed have not just been reclassified as 'disabled'.
This year, however, it is only public sector employment that is rising, the private sector is shedding jobs.
The tide of public spending is sustaining the British economy up. Retail sales are buoyant and so is the housing market. Old-fashioned Keynesian economics tells us that will give the economy a short-term boost.
But if a debt-financed government spending splurge was the key to success, the British economy of the 1970s would have been a world beater.
Can the British miracle last? Gordon Brown believes high taxes, growing budget deficits, weak investment, falling productivity and heavy-handed regulation are the recipe for prosperity. In that, economic history is against him.
Bloomberg newsroom, London
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