Economic Policy and Growth

The policy measures already discussed can be used to influence the various factors which determine growth. Fiscal and monetary measures can be used to stimulate pri­vate investment and public investment, research and devel­opment may be encouraged by grants and tax allowances, and the government can enlarge and improve educational and training facilities. It also has the ability to maintain demand at levels which encourage firms to expand their capacities.

If growth were the only objective of economic policy, there is little doubt that it could be achieved. But we know that governments are faced with the problem of conflicting objectives. In the UK, these conflicts have been particularly acute and for much of the post-war period aggregate demand has been managed with a view to dealing with balance of payments problems and esca­lating inflation. In fact, for much of this period output has grown at a slower rate than the country's productive potential.

The use of demand management techniques to deal with inflation and external deficits resulted in a series of 'stop-go' phases. Deflationary measures were applied to slow down the rate of inflation or to reduce the level of imports and they were relaxed when unemployment rose to politically unacceptable levels. Stop-go policies, however, are not likely to encourage those attitudes and expectations which are conductive to economic growth. If business people become convinced that any expan­sionary phase will be short-lived, they will not undertake the longer term investment projects which would increase the nation's productive capacity. When there is a lack of confidence in the ability of the government to carry out a sustained programme of expansion, any spec­ulation in shares and property rather than industrial investment.

Workers too are unlikely to be receptive to changing practices and techniques, many of which cause redun­dancies, unless they are convinced that sustained growth will generate new job opportunities.

The government may also find it difficult to per­suade people to accept the sacrifices which a faster rate of economic growth demands. If people have a very strong time preference it will require very high rates of interest to persuade them to forgo current consumption (i.e. to save and lend more). Likewise a movement of resources from the creation of social capital to the pro­duction of more industrial capital may be strongly resisted. If the economy is fully employed, any attempt to raise the rate of economic growth must entail some sacrifice in terms of present living standards, otherwise measures designed to increase investment will simply give rise to inflation.

Countries like the UK, which are heavily depen­dent on imported materials, face another serious prob­lem when trying to raise the rate of economic growth. An expansion of investment brings about an immediate increase in imports (materials and machinery) and since there is unlikely to be an immediate increase in exports, then, unless the country is enjoying an export surplus, the likely effect is a deficit on the balance of payments.

If a deficit does arise and the foreign currency reserves are inadequate to deal with it, or the government is not prepared to allow the necessary depreciation of the cur­rency, imports will have to be cut and the growth objec­tive abandoned.