Martin Weale begins by reviewing three factors consequent from the financial crisis and ensuing recession that might affect the level of supply capacity in the United Kingdom. First, he provides an estimate of the negative effect of an increase in the cost of capital for companies resulting from the post-crisis re-pricing of risk by banks and financial markets. Second, Dr Weale describes the possible impact of increased unemployment, and its duration, on productive capacity. But - opposing those factors - Martin Weale also suggests that a successful rebalancing of the UK economy away from public spending and towards private sector manufacturing production could help offset the reduction in potential supply, and improve its growth rate looking ahead. He stresses that such an effect may simply arise from the way in which GDP is measured, without saying anything about whether public sector employment is inherently more or less productive than private sector employment.
Published on
15 November 2010
Press release