‘Our biggest political and economic challenge is not Brexit. It is the fact that our growth rate has slowed to a crawl’
John Mills: “The big economic debate we need in the UK is not about Brexit. It should be about what we can do to get our economy to perform better”
Our biggest current political and economic challenge is not Brexit. It is the fact 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 per cent — provided we do not have another recession, in which case the projections will be even lower.
Growth at 1.5 per cent per annum is not sufficient to raise the standard of living for most people. By the time account is taken of our fast-rising population, our worsening net foreign income, the falling proportion of our national income paid out as 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 our 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 per cent — some 40 per cent 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 per cent in 1970 to less than 10 per cent now? As most world trade is goods rather than services, no wonder that we have a trade deficit of about £40 billion every year.
While £40 billion may be manageable, by the time you add our rising negative net income from abroad (around £35 billion), and another £25 billion 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 £100 billion — about 5 per cent 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.That 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 cent per annum, but this is not what is happening in China, India, Singapore and many other countries, large and small. The recent average annual increase in GDP in these countries has been around 5 per cent. A difference of 3.5 per cent a year cumulates to 41 per cent in 10 years and 136 per cent 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 per cent 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, compared to the more authoritarian regimes in most of the East?
Remedies abound. The Right puts its faith in privatisation, deregulation, lower taxes and a smaller state. The Left favours industrial strategies involving better education and training, easier finance for industry, more expenditure on infrastructure and less short-termism. There is little sign that any of these policies, on their own, would do much to help. What we need is a big debate on what would work. What would move the dial, lifting the UK’s growth rate to perhaps 3.5 per cent 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 economy is deeply uncompetitive. We do well on export of services, on which we have an annual surplus of around £80 billion but dismally badly on goods, with a deficit of around £120 billion a year.
The solution 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 to shift the proportion of GDP which we spend on manufacturing up from 16 per cent to somewhere near the 26 per cent world average over, say, a five-year period. 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 per cent to 15 per cent, 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 reduce regional and inter-generational inequalities and perhaps to income and wealth disparities as well.
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 urgently need a debate on what the elixir we need might be.