Britain’s lack of investment is the critical battleground in deciding our economic future. We need a determined investment strategy anchored in private-public partnership.
Notwithstanding the present recovery, Britain is seeing on-going erosion of its economic strengths, capabilities and competitiveness. One-time manufacturing and mercantile activities have already gone; and we are now losing technical and service activities against a backdrop of weak productivity, structural imbalances and detrimental inequality. Meanwhile other countries are doing more to sustain their economies through better technology, capabilities, skills and deployment of resources.
The most critical weakness is under-investment across the board from business to public investment in enabling the economy.
Already significantly less than its competitors for decades, Britain’s investment fell by quarter after 2008 and then remained abysmal. Even with recent improvements, it will be just 14 per cent of GDP in 2013. This compares to the average 24 per cent worldwide and 20.5 per cent for advanced economies (despite Europe’s problems). To match its peers Britain would be investing £100+ billion more a year.
Under-investment extends across all the widely agreed private-public drivers of economic capabilities and growth: investment in R&D and innovation, deployment of new technology, investment in equipment and machinery, public capital investment, infrastructure and investment in human capital (people).
Without investment recovery is only a veneer. Since 2008 real incomes have fallen by 10 per cent and productivity has dropped (while competitors have moved further ahead). But inadequate investment leaves little hope of the productivity increases needed to reverse downward pressure on pay. Weak earnings in turn drag on demand and growth. Meanwhile, the economy fails to develop new capabilities, products and services to replace inevitable attrition further down the chain.
Britain needs to invest considerably more to make up for past neglect and overcome its otherwise declining economic advantages. But leaving it to market forces and neo-liberal economic policies is emphatically not the answer; indeed exacerbates the economic erosion.
Successive economic cycles (and crises) have seen weaker investment, capabilities, employment and growth in direct correlation to pursuing such policies. Growth there is has come increasingly from febrile unproductive activities and/or greater short-term exploitation of markets, workers, assets and tax avoidance.
The ebb of market gravity is now against Britain given the mature economy, unfavourable mix of costs and productivity, declining capabilities, short-termism and aging infrastructure. Investment – footloose international capital or unfettered British resources – inevitably pursues more attractive opportunities elsewhere or driven to exploiting the present over investing in the future.
Pro-active government empowerment of the economy in partnership with the private sector is the only option.
Not only do strategies based on public-private partnership work, but there has never really been another option. All the successful economies run on this basis. In advanced economies private and public investment are both integral and complementary, not competing. Government direction and underwriting is both intrinsic and essential; the only question how you go about it.
But a strategy that is up to reversing Britain’s economic circumstances is demanding.
We need a triumvirate of determined pro-active investment, industrial and employment strategies. This means driving-up private sector investment with carrot, complementary public investment and stick. This means channeling investment domestically; not racing to the bottom pursuing foreign investment. Which in turn mean impinging more on the free movement of capital and profits. And it means raising the tax to pay for it all.
Government also needs to do a lot better at enabling the economy. Too much public expenditure contributes too little or indirectly to the economy, however worthy. Only 3.4 per cent is net capital investment and not enough goes into the economy’s critical underpinnings, whether it’s R & D, infrastructure or people.
We need better strategic leadership, planning and co-ordination and better structures and resources to ensure delivery on the ground. But today’s shortcomings are not inherent. Other countries and our own history show government can indeed change an economy’s trajectory with sufficient will and determination.
Considerable as the difficulties may be, it comes down to whether under-investment is to be the forewarning we heed, or just the epitaph.