The UK economic model must be completely redesigned before it’s too late

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Boris Johnson, escapologist and apologist for law-breaking lawmakers, is safe – for now at least. Unless new revelations emerge about his personal conduct, his deputies will not move against him.

Whether the electorate is so optimistic is another matter. We won’t know the final response from voters until the next election, but the limited time window until then raises a different question. What is all this for? As inflation spikes, recession loom and unions threaten to strike, there is gloomy talk of a return to the 1970s: the decade of the three-day week, the winter of discontent and a monetary crisis. which led to a bailout of the International Monetary Bank. Fund (IMF). While that sounds pessimistic, some economists think we’re headed for something even worse.

Then as now, Britain had uncertain governments. Ted Heath hoped to reform the economy and lost a battle of wills with the unions. Jim Callaghan ended up repudiating Keynesian economics before Margaret Thatcher adopted his monetarist alternative.

Yet our current discontent can be explained by the apparent success of economic policies since Thatcher. Many of the drivers of inflation and instability are global. China, factory of the world, is still in partial containment. Ukraine, Europe’s breadbasket, is unable to export its maize and wheat. Russia, a huge gas exporter, is sanctioned. Western economies are still recovering from their own lockdowns and dealing with these inflationary forces.

But consider the following facts. Before the financial crash, UK GDP per capita was only 75% of that of the US, and since the crash it has fallen further.

This is partly because the US economy is simply more productive. According to the Office for National Statistics, its productivity is up to 28% higher. And it’s not just America with which we compare poorly: our productivity is estimated to be 18% lower than that of France. What British workers produce in five days, French workers produce in four.

Since the crash, Britain has kept unemployment low. But wages have stagnated for more than a decade, and recent wage increases, driven by a tighter labor market, are now being wiped out by inflation, which, including housing costs, is running at nearly 8% , the highest in three decades. Inflation, the thief of the night, is a correction that brutally tells us that we are not as rich as we thought.

Britain is in a particularly difficult position. According to the IMF, our economy will grow less next year than that of any other G7 country. Personal debt represents 133% of household income. We have become accustomed to and dependent on ultra-loose monetary policy, with incredibly low interest rates and quantitative easing artificially supporting asset prices. Amid wrangling over whether the Bank of England should have raised rates sooner and more decisively, the elephant in the room was the effect even modest hikes could have on families with big mortgages.

We can argue about tax rates and regulatory regimes, but the reality of our predicament is more fundamental. We have an economic model dependent on consumption, but too many people have too low an income to consume without credit. We have reduced our manufacturing capacity and built a service economy that enriches a small number of people while creating many low-productivity, low-skilled and low-paid jobs. We have world-class financial services, a brilliant creative sector and high-performing manufacturers. The problem is that we have far too few of these.

As a share of our total economic output, manufacturing has fallen from 27% in 1970 and 17.4% in 1990 to less than 10% today. As production moved to Asia, manufacturing declined in all Western economies, but nowhere as severely as in Britain. In America, Germany, Italy and France, the manufacturing industry plays a bigger role in the economy than here.

The result is fewer productive and well-paid jobs, and in particular fewer such jobs in areas outside the South East of England. But more importantly, moving from a balanced economy to an unbalanced economy means fewer exports and a large trade deficit. This shortfall, which stood at nearly £60billion last year even during the pandemic, creates a series of perverse outcomes.

To finance the deficit and protect the currency, Britain must attract foreign capital, which only compounds the problem. UK businesses and other assets like utilities and building stock are being sold off to foreign investors. This risks creating a vicious circle that increases the deficit, increases the need for more and more foreign capital and distorts government policies. Utility companies can profit without investing in infrastructure. High asset prices – too high for many struggling Britons – must be maintained. Investments in technology and research and development are kept at a low level. Young and successful businesses are sold before they can grow.

We need a really radical change in this economic model. Without it, there can be no leveling up, no big improvements in productivity or wages, and we won’t get the most out of Brexit. Such a change will force us to break the shibboleths. Ever freer trade with developing economies may not work as conventional wisdom assumes. Aggregate demand matters. And Brexit – supposedly a danger to our well-being – may well help us. Already supply chains are reforming and European imports are down.

It is not a question of reviving the industries of the past, but of building the industries of the present and of the future. Nor is it to compete with lower cost savings on price. With investments, the right tax regime, and giving our people the right skills and training, we can compete on quality.

The strategic objective must be to achieve economic growth through a rebalanced economy. And everything – from education policy to immigration, from fiscal and monetary policy to energy policy, from labor market regulation to housing supply – must aim to achieve this goal. Our economy has many strengths, but we cannot continue as we are.

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