The 2020s set to be a decisive economic decade for the UK
The 2020s will determine whether we have a chance to avoid irreversible damage to the climate. But for the UK this comes with other big challenges. His response will also determine what will happen to the welfare of his people. Dominic Cummings’ brutal testimony this week suggests that his leadership’s ability to deliver is in great doubt.
The Resolution Foundation and the Center for Economic Performance of the London School of Economics have just launched a major survey on The decisive decade of the United Kingdom. This is decisive, because the country must face the resumption of Covid-19, the after-effects of Brexit, an ongoing technological revolution and the transition to zero net greenhouse gas emissions. Moreover, it does so from a base of stagnant productivity, high inequality, rapid aging and high debt.
Only a frivolous person would assume this will work for sure. Remember: in 1987, Italians celebrated he sorasso, the year in which their nominal per capita incomes exceeded those of the United Kingdom. But today, after two decades of stagnant real incomes, Italy is far behind. Its gap with Germany widened further. Yet over the past decade UK productivity has also stagnated. If this is not reversed, a declining UK will lose not only its prestige, but also the ability to improve the standard of living of its people.
The report spells out in sobering detail the challenges and legacy. In the aftermath of Covid-19, for example, there was probably a permanent shock to retail, a particularly important provider of jobs for women. Regarding Brexit, the impact on trade with EU countries is already visible, with little chance that trade with the rest of the world will soon (if ever) compensate for these losses. As far as technology is concerned, we have to assume significant and continuous changes in the structure of employment and competitive pressures, with the disappearance of many companies. When it comes to the transition to net zero, the country needs to make huge investments long before the gains from lower operating costs become apparent.
Then there is the terrible legacy. The low rate of productivity growth reflects, among other things, low investment and slow adoption of new technologies. The report notes that “in 2017, the UK only installed 71 robots per 10,000 manufacturing employees, compared to 309 in Germany and 631 in Korea. Due mainly to weak productivity growth, real household income growth fell from 22% in the 2000s to just 9% in the 2010s. Again, inequality soared in the 1980s. and never reversed. Therefore, “the British Gini coefficient [a measure of inequality] is higher than in all EU countries except Bulgaria and the second highest in the G7 ”. The UK also exhibits exceptionally large regional inequalities in productivity, making the rather less unequal regional distribution of household income dependent on remittances from London, whose most competitive industry, services, has been happily sacrificed on the altar of Brexit.
In light of all this, the Prime Minister’s easy boosterism is a luxury the country simply cannot afford. What is needed instead is the “Tell the ruthless truthRecommended by Keynes to the then nascent IMF. As the report states, the UK has important strengths, including its language, top-notch universities, a strong scientific base and largely uncorrupted politics. The government has also already established a “plan for growth”Which has welcome elements, including somewhat higher public investments, a plan for lifelong learning, a focus on innovation and science and decarbonisation targets.
Yet the costs of Brexit or the obstacles to a wider spread of prosperity go unrecognized. There is no certainty that the necessary money will be spent on skills. There are also big holes in the decarbonization plan. Perhaps most importantly, instead of ideas on how to increase private investment, the Chancellor intends, after a brief period of generous investment allowances, to dramatically increase the tax on companies. This will reduce the already low investments. Yes, we will get “free ports”. But these will prove to be a zero-sum gimmick.
When we look back on Covid-19, we see a chain of blunders, partially redeemed by a flash of inspiration: the vaccination program. But a single inspiration will not guarantee the development of an economy in such difficult circumstances. This requires far-sighted policy development and resource mobilization by a competent political and administrative machine in a supportive relationship with a vibrant private sector. We need politics, not gestures, and respect for reality, not slogans. Is this feasible in the UK? Perhaps. Is it likely? No.