John Eatwell on the need for new management to ensure the UK’s future economic security
The only sustainable way to recover real incomes and hence cut inflation is to increase productivity. Increasing productivity requires investment. Investment requires the confident prospect of growth. Achieving that nexus is the challenge we face.
The past 15 years have been a tough time for world economy. Yet since 2010 in the key variables of investment and productivity, the UK has done consistently worse than comparable countries. Year on year, investment as a share of GDP has been the lowest in the G7. And our productivity gap relative to France and Germany has almost tripled from -6% to -16.
Those 13 years of persistent economic under-performance are the key to why the UK is now locked into low growth and high inflation, with ever rising taxes and interest rates. And why the public realm is in an advanced state of breakdown as despairing public sector workers face ever increasing cost-of-living.
Why has this happened?
In the face of every major shock suffered by the economy over the past 13 years, government decisions have damaged the investment, growth, and productivity.
The cost of rescuing the banks and supporting the economy in global financial crisis left the UK with a high level of debt. In the first half of 2010 the Chancellor, Alistair Darling had steered the economy onto a steady growth path approaching an annual rate of 3% and cutting the debt/GDP ratio. In May of that same year the new Chancellor, George Osborne reversed Darling’s policy. Austerity killed the growth rate stone dead.
Austerity was an attempt to cut the debt by cutting spending. The trouble was that it cut the growth of GDP at the same time. Osborne’s debt/GDP ratio did not fall as predicted. He had chosen the wrong policy.
The next major economic shock to the UK was the vote to leave the EU.
Following the referendum result, the Conservative government took the wrong decision again. Instead of negotiating, post-Brexit, a close relationship with our largest trading partner, they decided on so-called hard Brexit. The result? While the value of French exports has grown by 16% in the past 7 years and German exports by 23%, UK export growth has been 6%.
Next came the double whammy of the pandemic and the war in Ukraine. Last autumn, Liz Truss’s government correctly identified Britain’s fundamental economic weakness when facing these challenges: the slow rate of growth. But once again the Conservatives chose the wrong answer: in this instance fiscal incontinence. And the mini-Budget led soaring interest rates, hammering investment and growth yet again.
The foundation for sustained investment and productivity growth is the complementarity between public and private investment. If we are to build a competitive economy, we need a new relationship between government and industry. A new relationship to be consumated in the pursuit of a single dominant objective – investment, public and private.
For years this has not happened because our economic institutions, public and private, have not been up to the job.
The government must create a new institutional environment, financial and corporate, that sustains the needed investment with ideas, skills, and finance – and, crucially, supported by the confident prospect of future demand. Without that, there will be no investment, however good the projects and however abundant the finance or tax incentives may be.
That is why Conservative policies that cut demand, squeeze the economy, and create financial uncertainty have been exactly the opposite of what is needed.
The UK needs not only to catch-up, but to use our technological and research expertise to leap-frog our competitors, in a world economy that has changed fundamentally since the pandemic. National security will require safe supply chains and strong home-based industries and services. The globalisation free-for-all is over.
As a country, we can’t take more economic blunders. “Holding our nerve” won’t do the job. Our future economic security needs new management. And it needs it now.
Lord John Eatwell is a Labour Peer
Published 27th June 2023