Low productivity and rising debt have left the UK trailing other G7 countries
Once again, Britain is topping the G7 league tables for all the wrong reasons. Recent reports show that besides paying the highest interest charges on its national debt, the country also has some of the worst labour productivity — which is saying something since there are no star performers in the latter category just now.
Some of Britain’s higher interest charges result from a debt-management strategy that leaves the Government more exposed to inflation-indexed interest rates as well as to foreign investors, who own a higher share of national debt than is the case in other G7 countries. Not only has this ensured that interest rates rise in line with inflation, but they also leave the Government dependent on the whims of strangers, as Mark Carney put it and as Liz Truss found to her (and millions of mortgage-holders’) sorrow.
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However, the twin failings of high debt charges and low productivity are also probably related. An ageing population produces a rising dependency ratio, meaning that every working person must support a growing number of retirees. Unless a country supercharges its immigration policy, as Canada has done, it must increase what each worker produces just to be able to keep these people in the style to which they’ve grown accustomed. Britain has done neither. Yet both the Government and Opposition, which remain committed to the triple lock on pensions, are determined to maintain the living standards of pensioners.
Since workers can’t keep up with these demands, either taxes or borrowing must rise. At the moment, both are happening in Britain, with taxes rising by stealth as taxpayers are pushed into higher brackets (even though their real incomes might not have moved much). Either outcome alerts investors to the uninspiring long-term prospects of the economy, especially when the rise in borrowing is used to fund current rather than capital spending. In response, investors demand a higher risk premium on UK debt, gradually making the country look in debt markets like an emerging economy. This is the slow downward spiral in which Britain currently finds itself.
Assuming that inflation continues to fall, some of the pressure will ease in the short term. But this won’t solve the problem, merely giving the country a bit of breathing room to find a solution. The Government, whether this one or a future Labour ministry, will have to either find a way to raise labour productivity or make some tough choices — like ending the triple lock on pensions or raising headline taxes.
What’s more, raising labour productivity would itself likely involve tough choices. Over the last decade, one of the most lucrative possible investments was in real estate, beating stocks and savings accounts by some distance. Both the Bank of England and Government juiced property markets with a combination of easy money and demand-stimulating policies, such as Help to Buy and stamp duty cuts.
But — unlike factories or restaurants — once built, houses produce nothing. And because property owners prefer that new houses not be built, since that can inhibit the price of their own investment, governments have repeatedly succumbed to their demands, limiting housebuilding and further inflating this non-productive sector of the economy.
It’s widely accepted that Britain won’t raise its labour productivity very much until it raises its low rate of business investment. To do this would probably require it to reduce the returns on real estate. At the moment, nobody seems in a rush to do that.