That is an interesting theoretical point. In fact, it travels under a very fancy name, “Ricardian equivalence”, and a heap of academic theory has been written about it. I greatly look forward to discussing it with the hon. Lady in the Treasury Committee, and I know that the other nine Committee members look forward to our exchanges as well.
The right hon. and learned Member for Camberwell and Peckham talked quite a bit about productivity. As the economy has begun to recover and growth has begun to return, people are saying that it is not the growth that they wanted. They are saying that it is in the wrong part
of the country, that it is going to the wrong people, or—as we are hearing now—that it is not accompanied by productivity. That has been true so far, but it is important to bear in mind a few points about productivity.
First, we are recovering from the worst recession in economic history. There has been a 6% fall in output. A shock on that scale is huge for the economy to absorb, so of course that means that the recovery will be uneven. What really lies behind the recovery is a massive reallocation of capital as well as labour, across regions, across the labour market and across sectors of the economy, so we might well expect productivity not to move in line with that in previous recessions.
Secondly, in any case, much of the growth in the run-up to the crisis was fuelled by over-leveraged banks lending to over-leveraged households. That was unsustainable. Comparing productivity levels with what they might have been had growth continued at the pre-crisis rate is therefore highly misleading, because it means imagining that the unsustainable productivity levels could have been sustained, and we know that they could not have been. The peak levels of productivity are probably a chimera.
Thirdly, we should bear in mind the fact that lower productivity reflects much more flexibility in the labour market than many people had feared. Most had thought that unemployment would be much higher than it has turned out to be, perhaps 3 million or even 3.5 million. If the labour market had been less flexible, we would have had higher unemployment. We would also have had higher productivity, but I do not think there are many takers for that in the House, particularly now that we know how important it is to secure labour market participation among the young, on social as well as economic grounds.
There are other developments in the labour market that might affect the productivity statistics. For instance, productivity has been held down by rising rates of workforce participation among older people. That is an intended, and welcome, consequence of the Government’s pensions policy, and, to a degree, it represents the policy not only of the coalition Government, but of both Governments before that. So I think that, when all those factors are taken together, the productivity problem is not necessarily as serious as it initially appeared to be. However, I also think it important that the Chancellor’s measures bring about a pick-up.