In going for an early election focused on Brexit, the Conservative government knows even the superficially good economic news is unlikely to last.
Four years of GDP growth, high levels of employment, the deficit down to pre-2008 levels and the stock exchange at record highs might all suggest the sun is shining on the British economy. And the economy has certainly proved surprisingly resilient in the face of systemic shocks of first the 2007-08 crisis and aftermath, then contraction-inducing austerity and now Brexit. At least here and now, Britain is growing faster than its European peers and after all remains a leading industrial economy (doesn’t it?).
But these positives are not as they seem and camouflage fundamental weaknesses increasingly sapping Britain’s economic strengths. If not better addressed, these foreshadow ongoing economic decline.
GDP growth has been all but entirely driven by consumer spending; in turn funded by increasing borrowing and drawing down savings. The substantively productive sectors are at best weak. Construction remains desultory and manufacturing barely treading water despite the sharp currency depreciation boosting exports. And, despite coming late in the day and being all too thin on the ground, the upbeat phase of the present economic cycle is already fading. Meantime, the benefits of growth are accruing in too few hands. Indeed, as rewards at the top increase well ahead of growth, those for everyone else continue to fall.
With 31.8 million people in work, employment levels are indeed high. But this masks ongoing deterioration in the quality of work. It includes 6.5 million employees – 23 per cent of the workforce – earning less than a living wage; 4.8 million self-employed, many less than enthusiastically (1.3 million earning under £6,000 a year); 8.3 million in part-time jobs and 1.6 million in temporary work, with many wanting something more; 1.4 million on zero hours contracts; and 900,000 on apprenticeship, many of dubious quality.
Average earnings are 2.2 per cent higher than a year ago. But after inflation real earnings are again falling; having fallen sharply after the 2007-08 crisis and then continued to fall until late 2014. Furthermore, with pay at the top increasing faster than growth, earnings further down the pay-scale are shrinking faster than headlines suggest. Under current forecasts 65-70 per cent of pay-packets will fall in real terms until at least 2022. Public spending cuts are then further reducing incomes, hitting the least well off hardest.
The deficit coming down to 2.6 per cent of GDP, having peaked at 9.9 per cent in 2010, is only after the national debt having ballooned from £750bn in 2010 to today’s £1.73 trillion. Government borrowing is now set to increase again next year and even if forecasts are met it is unlikely the books will balance until 2025 – 10 years behind schedule thanks mainly to an austerity-induced collapse in demand. Even here only around 30 per cent of the deficit reduction has come from growth, with the rest down to spending cuts at the price of long-term economic damage. Taxes will therefore still have to increase to tame borrowing.
Finally here, the stock exchange reaching record highs has little to do with improved productive performance. Rather it is driven by currency depreciation flattering overseas earnings; floods of QE funny money; and investors’ desperate hunt for returns in the face of universally low growth and interest rates.
Beneath the surface the British economy’s faces fundamental challenges as deep-rooted structural weakness intersect with intensifying competition and globalisation. Here economic and market gravity are now flowing away from Britain with its already diminished capabilities, aging infrastructure (and population), lack of investment and, frankly, under equipped workforce yet high labour costs (and taxes).
Britain is running a massive, increasing unsustainable trade deficit. We continue to import a lot more than we export; and can’t keep paying for the difference by borrowing, remitted overseas earnings and selling the silverware – alleviated only briefly by recurring currency depreciations.
Investment is parlous even in the context of decades of under-investment. Productivity is actually falling while competitors are increasingly moving further ahead. Company profit growth in Britain is increasingly driven by greater short-term exploitation of markets, workers or assets and reliance on less productive or rentier activities (gambling and consumer lending are obvious examples).
Essentially, Britain is losing productive capabilities, businesses products and markets to lower cost economies faster than new ones to replace them are arising; and this even worse than it seems when less substantively productive activities are stripped out.
Britain’s national wealth is 62 per cent property-related, a far higher proportion than most industrial countries, with values driven up only by self-inflicted supply shortages and rock bottom interest rates. Measured by productive assets, Britain is now only the 18th or 19th wealthiest country.
Meanwhile, Britain’s workforce is under equipped and under skilled. A far higher proportion of Britain’s workers are unskilled and semi-skilled than in other leading industrial countries. While academic education is passable compared to competitors, all aspects of vocational education, training and skills development are woeful. There is then poor alignment between the skills on offer and those needed economically; with recurring skills shortages and bottlenecks persisting for decades.
The final weakness is inadequate economic policies and political leadership; a combination denial, piecemeal policies and abrogation of responsibility to the market alone. Successive doses of neo-liberal policies have failed to deliver resurgent growth, investment and new businesses, while compounding the coring out or off-shoring of existing markets and businesses. Meantime the tax system overtly favours unproductive over productive activities while driving businesses to send as much as they can offshore and to bear down relentlessly on workers. All this has significantly increased inequalities; which are now as economically damaging as they are socially pernicious.
And it is in the context of meeting these fundamental economic challenges Brexit needs to be seen. Clearly, the uncertainty alone doesn’t help. All but inevitably, however, any final Brexit deal will see some kind of access to the EU market – but at a punishing price.
The EU is foremost a free trade area behind its own protectionist wall; one accounting for 44 per cent of British exports (9 per cent of GDP) but only 8 per cent the world. Any likely tariffs – or more likely flat payment for access – might well be more than offset by the pound’s economically much needed depreciation; with possibly an uptick in exports and rebalancing between domestic and import prices. There might also offsetting trade gains, with opportunities to reduce tariffs on non-EU goods and for new trade agreements more suited to Britain. But even we do manage to secure such trade deals; they will not address the underlying weaknesses in the economy.
Britain’s economic future still depends on developing the new capabilities, products, businesses and jobs to replace those inevitably being lost to lower cost competition from both within and beyond Europe; in other words, innovation, business development, enterprise and economic enablement.
Here the EU provides much of the present research and development, strategic and regional development funding. But there is no intrinsic reason these can’t be directly funded instead – although whether they will be is another matter.
Indeed, in the context of Britain meeting its essential economic challenges, the danger is all the problems we face are now attributed to Brexit while we continue to fail to come to grips with economic realities.
Meeting these challenges cries out for a new economic strategy in place of failed neo-liberal policies. The cornerstones are bold, co-ordinated industrial, innovation and investment policies; a revolution in lifetime skills and training; housing-property-land reform; and major tax reform. Together these are the only way to square the circle between improved economic performance, paying for essential public investment and services, and greater fairness and equality.
For Labour hard-headed economics, voters’ greatest concerns and greater fairness all now potentially pull in the same direction. It now needs to weave the economic essentials into a strong, compelling appeal to voters.
Otherwise the likelihood is a re-elected Conservative government; hence creeping economic deterioration masked by fading fits and starts of superficial economic sunshine.