Why is the UK's growth rate so low and how can we solve the problem?
The UK economy has recently grown by 1.4 per cent per annum, compared to a world average of 3.5 per cent. This has not been sufficient to raise real incomes for most of the population, whose living standards have stagnated or fallen. It has undermined confidence in our political leadership, generated austerity, divided the country, left us increasingly a bit player internationally, and undermined faith in liberal democracy. We very badly need to get our growth rate up.
Why is our growth rate so low? A competition recently launched by the Institute for Public Policy Research, which will be judged by a panel including myself and which I am supporting, is set to try to find answers. But meanwhile, let me give you my take.
The root problem is that we invest far too little — barely 16 per cent of our GDP compared to a world average of 26 per cent, and 45 per cent in China. Worse, we spend almost nothing, especially net of depreciation, on the few types of investment — mechanisation, technology and power — which are capable of producing big increases in output per hour. This is why we have such a desperate productivity problem.
And why do we very largely lack these key types of investment? It is because their natural home is in internationally tradeable light industry and the UK has largely priced itself out of the world market for this type of output. We run our economy to suit our not very price-sensitive service sector, where we have big natural advantages in our language, legal system, universities and where our talent goes at the expense of manufacturing, where we have none of these benefits. This is why manufacturing as a percentage of UK GDP has collapsed from being nearly one third as late as 1970 to barely 10 per cent now.
This has had four disastrous consequences. It has lost us millions of high-quality, well-paying jobs. It has deprived us of the increases in output per hour which manufacturing is much better at producing than services. It has generated massive regional imbalances between London and most of the rest of the country. And it has left us without enough to sell to the rest of the world to enable us to pay our way, leaving us with gaping balance of payments deficits every year. The consequence has been ever-rising borrowing and sale of UK assets to foreign interests to enable us to sustain a standard of living which we are not earning.
What do we have to do to overcome these problems? We need a radical shift in economic priorities to achieve a major change in incentives. In particular, we need a low enough exchange rate to make widespread investment in UK industries profitable again. Is this going to happen? We shall see, but if it doesn’t, then most of the UK population is going to have another ten years of stagnation while the rich get richer and the country becomes more and more deeply divided. What is this going to do for our economic, social and political stability?