By John Mills,
Our biggest current political and economic challenge is not Brexit. It is that our growth rate has slowed to a crawl.
Brexit will be over in two or three years’ time. Whether this leaves us in the Single Market and the Customs Union or with a Hard Brexit -.or more probably, with a compromise somewhere in the middle – will make some difference to the UK’s economic prospects, but not much. Whether you are optimistic about your favoured outcome, or frightened of one you do not want, neither is expected to shift the UK away from having an annual growth rate in the coming years of around 1.5% - provided we do not have another recession, in which case the projections will be even lower.
Growth at 1.5% per annum is not sufficient to raise the standard of living for most people. By the time account of taken of our fast-rising population, our worsening net foreign income, the falling proportion of our national income paid out s wages and salaries, and the tendency for those with the sharpest elbows to collar what little total increase in incomes there is, nothing will be left for everyone else. A majority of the UK’s population are earning now no more than they were in 2007. What is it going to be like if, as seems likely unless there are big changes in policy, they are no better off in 2027?
This is why the big economic debate we need in the UK is not about Brexit. It should be about what we can do to get or economy to perform better, starting with what we can do about the huge imbalances there currently are. Why is investment as a percentage of GDP – at barely 16% - some 40% below the world average? Why have we allowed the UK to deindustrialise to the extent we have – down as a percentage of our national income from 30% as late as 1970 to less than 10% now? As most world trade is goods rather than services, no wonder that we then have a trade deficit of about £40bn every year.
While £40bn may, all the same, be manageable, by the time you add our rising negative net income from abroad – around £35bn - and another £25bn deficit on transfers – net payments to the EU, migrant remittances and our aid programmes – we reach a much more daunting total annual balance of payments deficit of around £100bn – about 5% of our GDP. This huge and ultimately unsustainable deficit sucks demand out of the economy, which has to be replaced by unfunded government and consumer expenditure to stop the economy contracting, which is why government debt goes up and up and the UK economy is currently far too dependent on rising consumer borrowing. This is supported by vast quantities of Quantitative Easing which, in turn, is largely responsible for the asset price inflation since the 2008 crash, which has produced such hugely unequal benefits to those who are already wealthy compared to those who are not so lucky.
The consequences of very slow economic growth and stagnant incomes are not, however, problems that impact solely on the UK from a domestic perspective. There are huge international ramifications too. The UK may be dawdling along, growing at 1.5%per annum, but this is not what is happening in China, India, Singapore and many other countries, large and small, all over the planet. The average annual increase in GDP in these countries recently has been around 5%. A difference of 3.5% a year cumulates up to 41% in 10 years and 136% in 25 years’ time. If things continue as they are, between 2018 and 2030, median Chinese earnings are likely to have grown by about 90% while ours may not have moved up at all. What is this going to do for the reputation and support for liberal democracy, the rule of law and western values generally, compared to those of the more authoritarian regimes in most of the East?
What can we do about this situation? Remedies abound, but few of the look like being effective. The right of centre puts its faith in privatisation, deregulation, lower taxes, and a smaller state. The left tends to favour industrial strategies involving better education and training, easier finance for industry, more expenditure on infrastructure and less shot-termism. There is little sign that any of these policies, on their own, would do much to help. What we need now is a big debate on what would work. What would move the dial, lifting the UK’s growth rate to perhaps 3.5% per annum on a sustainable basis while unwinding all the major imbalances which everyone agrees are holding us back?
Here is an opening contribution to the debate. It starts from the proposition that the root cause of the UK’s problems is that the UK economy is – on average – deeply uncompetitive. We do well on export of services, on which we have an annual surplus of round £80bn but dismally badly on goods, where we have a deficit of around £120bn every year. The solution to our problem, therefore, is to make our manufactures much more competitive. To do this we need an exchange rate low enough – probably around parity with the US dollar - to make it profitable to invest in new manufacturing capacity in the UK rather than in China or Germany - taking a leaf out their books, incidentally, because this is exactly what they do.. Our target should be over, say, a five year period to shift the proportion of our GDP which we spend on manufacturing up from 16% to somewhere near the 26% world average. Since it is in light industry more than anywhere else in the economy that productivity increases are easiest to secure, this is what would push up our growth rate.
If we could get manufacturing as a percentage of GDP up from 10% to 15%, and our exports rose pro rata, this would come close to eliminating our balance of payments deficit and thus government borrowing, because one is to a large extent the mirror of the other. Using exports, import saving and investment to drive demand would make Quantitative Easing and other forms of ever-increasing debt unnecessary. This mix of policies would not only raise almost everyone’s real wages; it would also provide space to reduce regional and inter-generational inequalities and perhaps to reduce income and wealth disparities as well.
Certainly, not everyone would readily accept that a strategy along these lines would work, But if not, why not, and what do they propose instead? It can’t be true that some economies are bound to fail whatever they do while others are always going to be successful. It is the way they are managed which makes the difference. We very urgently need a debate on what the elixir we need might be.
Labour Leave shares a number of viewpoints from external commentators, both Leave and Remain, without necessarily endorsing any of the viewpoints therein.
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