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October 29, 2024 - 11:15am
Tomorrow, we’ll be drowning in the details of Rachel Reeves’s first Budget. But, within the bigger picture, there are three uncomfortable truths which define the British economy in the 2020s.
Firstly: taxes. As we’re constantly reminded by tax-cutting Right-wingers, the tax burden is at its highest level for 70 years. However, as they’re less likely to remind us, it’s lower than just about every other Western European nation.
Keir Starmer’s government knows there is scope to squeeze the pips harder. What’s more, it has a reason for doing so — which brings us to the second uncomfortable truth. The fact is that we simply don’t invest enough in ourselves. In the UK, public investment — i.e. by the state — is markedly lower as a percentage of GDP than in any other G7 country. The same is true of private sector investment, too. No wonder “nothing works” in broken-down Britain: either we haven’t maintained it properly or we never commissioned the necessary infrastructure in the first place.
Hence Starmer’s promise to “fix the foundations” — or at least use this as an excuse to put up taxes and increase borrowing. That’s the trouble with denying the underlying economic realities facing the UK. The Tories imagine they can stick to a tax-cutting agenda like it’s 1979, but all that’s achieved is to ensure the actual priorities of 2024 will be tackled the Labour way.
It does, in fact, matter who fixes the foundations. This is because Labour is probably further from the Tories in accepting the third — and most uncomfortable — truth about the British economy.
For too long, we’ve relied on importing cheap foreign labour to prop up economic growth. This ignores the vital distinction between overall economic growth and economic growth per capita. Take a look at a chart that compares these two measures across the G7 countries, as well as Spain. Overall growth and per capita growth are up in the US (the star performer) and to a lesser extent in Italy, Spain, Japan and France. In the UK, however, only overall GDP is up. Our per capita GDP is actually down, meaning that as individuals we’re getting poorer. In other words, the main reason why the UK economy is getting bigger is that we’re cramming ever more people into the country.
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SubscribeWhat does the author actual mean by “The fact is that we simply don’t invest enough in ourselves. In the UK, public investment — i.e. by the state — is markedly lower as a percentage of GDP than in any other G7 country. The same is true of private sector investment, too.”
When this comes from the labour party it means substantial pay increases for public sector worker and an ever expanding public payroll for no discernible benefit. That is not my ideas of investment
It is indeed not investment. It is simply spending. And spending without regard for whether it generates any productive return. Or whether, if it does, better returns might have been made by using the resources for something else.
Spending is easy. Investment – good investment – is hard.
We’ve been here before. With Gordon Brown.
I’ll just note that most of the money spent on HS2 has been spending rather than investment. I’m sure it’s officially called investment. But all the money spent on the sections that will never get built isn’t investment. Alongside all the waste on parts that may get built. But it has created a lot of high value/high wage jobs. But temporary and unsustainable ones.
No party wants to admit it but Growth can only occur by increased labour. More productivity per pound. Our manufacturing industry was decimated by the avarice of 1970s trade unionists. Simply paying any worker more to do the same job is economic nonsense. It would be much cheaper to invest in AI to replace train drivers in the medium term rather than accept unmerited demands.
I asked the same question two days ago. Growth in manufacturing is easy – you make more goods for the same cost. What is growth in a service industry?
Do train drivers work longer hours for the same pay? Do nurses walk faster between the wards? Do nurses double as cleaners? Do surgeons increase the number of operations they do in a day? Do teachers take on bigger classes for the same money? Do teachers do more preparation in their holidays?
How would you sell these things?
Growth in a service industry – HMRC existing staff numbers answering the phone after three rings and helping tax payers efficiently – that is improved public sector productivity
Actually there is likely to be massive scope for productivity improvement, coming from effective use of technology and efficient and effective use of resources – ie good management.
In concrete terms? Fewer paramedics sitting for hours on end in expensive ambulances in the car park because the hospital has no space for the patient they’ve brought in. Fewer doctors held up because they can’t find a computer that works etc.
there is likely to be massive scope for productivity improvement, coming from effective use of technology
and the public sector unions will be welcoming these “improvements” with open arms-not!
Train drivers don’t take an extra break just because a manager spoke to them. Nurses don’t stand round the desk chatting. Surgeons trust new technologies to speed up assessments and operations. Teachers start lessons on time. How do we sell such radical ideas? We say it’s essential for society and you do it or you’re out.
Perhaps in 1850 such a Marxist labor theory or value interpretation was correct. However, since then one can argue that productivity really comes from technology, supply chains, innovation – where also the subjective valuation of products and services play a role. In fact, a bigger problem for growth is that many sectors have an overcapacity for which there is limited demand, investment is increasingly absorbed by the financial industry in the West. But also locally producer countries like China are suffering from weak demand now. So simply stimulating wages or even benefits can have an impact on growth. If that is meaningful growth is a different question but that problem lies at the heart of the capitalist system I think.
Sure – that was the 1970s. Since then we’ve had a technology revolution, widening inequality – and a lot of people having little to show for their efforts. While others are frankly rolling in wealth. Things may look grim at street level, but the producers of luxury goods are enjoying a golden age.
Its pointless 50 years later complaining about trade union avarice.
I agree with much of what you say but shudder at the idea of the Stare playing an even larger role in the economy. The State’s monopoly powers need to be constrained, not indulged. The wealth creating part of the economy, which is almost wholly non Stare owned , needs to prosper and grow so that indeed GDP per capita can increase – but simply increasing the share of GDP controlled by the State will not do that – quite the reverse in fact.
The author at least gets the problem with immigration. For writing it down and managing to get it past the editor the author deserves a lot of credit.
That said, there are many points that deserve a challenge.
“As we’re… reminded by tax-cutting Right-wingers, the tax burden is at its highest level for 70 years… they’re less likely to remind us, it’s lower than just about every other Western European nation.” Because it’s working out just dandy for Western Europe… we’re the slowest growing region on Earth. What a benchmark to pick.
“Keir Starmer’s government knows there is scope to squeeze the pips harder.” I’m sure they do think that, but that’s not the same as knowing it. Rising gilt yields suggests otherwise. As does the huge number of high net worth individuals giving up being domiciled here. The only pips that will be squeezed are ordinary people trapped here.
“The fact is that we simply don’t invest enough in ourselves. In the UK, public investment… is markedly lower as a percentage of GDP than in any other G7 country.” Sooo, all those previous tax rises have led to lower investment… the problem clearly isn’t a lack of money but a willingness to invest it in capital projects instead of pay rises… The government has just spaffed nearly £10bn on above inflation pay rises for the public sector. So no change there.
“either we haven’t maintained it properly or we never commissioned the necessary infrastructure in the first place.” Maintenance isn’t investment. The writer seems confused about what constitutes investment.
spot on-and The writer seems confused about what constitutes investment.
Methinks the writer is confuded about a lot of things
Correct. Until they measure by GDP per capita they will never make progress.
Investment means buildings, roads, machinery etc. It does not mean spending on diversity officers.
No one explains how taking a pound away from an efficient business and giving it to a civil servant improves economic growth ?
It could do if they built good transport infrastructure thus tripling the potential workforce available to a business or got through the NHS backlog so that more people come off long term sick benefits and get into work.
‘more people come off long term sick benefits and get into work’. The vast majority of them Mathew DON”T want to do that; its a lifestyle choice
Oh come on, what about those nice, overworked people in DEI departments?
The article ignores the impact of energy prices…
The industrial electricity prices 2019:
the (star performing) USA 5.10 pence per kWhthe UK 10.95 pence per kWhand in 2023 the UK price is 25.46 pence per kWh. Figures provided by GOV.UK.
It would seem that there is a drag on the UK economy not solely related to labour productivity (but rather Net Zero ideology).
It’s the high cost of gas following the Ukraine war that dominates UK energy prices.
Well, given that we’ve given up on nearly every other form of energy, it’s hardly a surprise
A reasonable analysis, I think. A huge amount of wealth and liquidity has been injected in the economy. But it seems to mostly end up in one of Ponzis in the financial sector and/or asset bubbles like real estate. Sure, that looks good on paper but apparently it also bleeds dry the real economy where everything stagnates. So redirecting wealth to stimulate demand and rebuild the infrastructure for an economy where something happens besides rent seeking makes some sense.
it’s lower than just about every other Western European nation.
What an inane comment-and has he noticed that the comparitive economies so referenced are all tanking as economic activity and growth inexorably move to the Middle East,Far East amd Eastern Europe.
I took a look at the linked chart, but two years do not make a trend. There may well be something worth pointing out here, but please use better data to show it.
GDP per capita is certainly more relevant than national GDP, but let’s also be clear that GDP is only one economic indicator. It’s not the same as wealth or quality of life.
For a different take, one could also say “people flock to the UK”. Sounds quite different, doesn’t it?
How about “poor people flock to the UK”…different again…
If you had £50,000 in 1995 your best move would have been to buy a property with a big mortgage and let it out. And keep on buying property. With so much capital locked down in property how much incentive is there to start and invest in businesses which provide a service or make something useful?
So from the Tax Payers Alliance the news that 318 public sector jobs are being created every day leaves me to think where the money gained from this budget is heading
And they’ll all vote Labour
Tomorrow some of us may be drowning in a plethora of misaligned budget measures …. and some of us are popping up to Laxey for a flake ice cream, a walk up the beach, and to count their blessings.
Good article. It might have been helpful to draw distinctions between current and capital spending and the danger of Labour doing the former (providing an in-term benefit) rather than the latter, which typically delivers a benefit in the next parliament. yet talking the language of “foundations”. So, too, a history of government’s poor track record in capital investment – both in terms of strategy (HS2) and delivery (countless overruns on spending and delivery times). Where are the long-term, structural incentives for British businesses to investment in capital plant and equipment, training and R&D? Sunak/Hunt made a start on R&D, but it’s far too hand to mouth to gather trust or energy amongst business managers.
Just to flesh out the immigration figures. Reading University study of 2018 shows that immigration is responsible for 1-2% house price inflation per annum (average annual inflation 3.2% over the long run). It is also responsible for approximately 33% of the inability to get on the ladder (demand vs supply). Moreover, the current shape of our immigration “policy” (low skilled labour) is costing us £151k in their lifetime (assuming they arrive at 25 and die/or leave at 65). This figure goes up over £400k if they stay and live until 80. The salary required to breakeven on positive in-lifetime contribution to the UK is £48,000 (source: Professor Davies, Imperial College and OBR, 2024). Given that the median salary in the UK is £36,000 this is clearly going to require some Premier League immigration policies to ensure that we can all pull the boat forward, rather than allow all boats (indigenous and incomers) to deflate if not sink.
I have yet to see any Labour policies that speak to growth, despite the mantra. Even the promising attempts to take on housing saw Raynor back off London housing targets, whilst planning to over-build in places like Northumberland, that hub of industrial fervour, Cheviot sheep, and endless beaches. Development PNLs are split 3 ways: 33% land, 33% build, 33% profit. HItherto the land uplift value has gone to the developer, which has been one factor in land banking – Labour’s plan is for the land uplift to now go 100% to the state through CPOs!! What could possibly go wrong? Prepare for years of litigation as landowners unsurprisingly fight this tooth and nail, let alone NIMBYs and the green lobby doing their Orange Splat manoeuvres to protect bat housings and newts. And don’t get me started on the Ed Miliband Blackout Programme. This week I was reminded by a respected energy analyst to forecast the future based on what we know now, not on what we might wish were possible or can envision at some point. Right now, there is no storage solution for Dunkelflautte – we need backup and that means 2 energy sources and that means cost. I continue to believe, irrespective of the moral rights or wrongs of Russia’s invation of Ukraine, that history will see the Russian sanctions as a key turning point in geopolitical history.
Sorry for the rant. This is all so bonkers at a time where we have little room for fiscal manoeuvre. In the substack corners of the macro economic world I follow, some bright minds believe the UK is not far off a sovereign debt crisis and we can see yields are creeping up. We cannot afford rookie errors or student politics. The absence of anything I can identify as “coherent” concerns me.
A crisis is coming, as you suggest. It’s almost certainly going to be energy, though I wouldn’t rule out large scale riots. Dunkelflautte, or “Absolutely no wind, for an extended period” happens, at least partially, almost every year in the North Sea area. What’s going to happen when Scotland and northern England are without power for a month?