The Long View: There has been concern that the developed world’s long term growth has slowed and new technologies are not going to have the same impact as previous developments. Emerging economies can catch up but developed ones have fewer opportunities for intensive growth. Some economists suggest that the last 200 years were a continual wave of change, which has now slowed and we will no longer find it easy to replicate the big changes such as electricity, the internal combustion engine, petrochemicals, telephones and computers. Even in daily lives things have changed relatively little in the last 40 years (think the home, transport, medicine, the working environment) and such things as Twitter & Facebook are of little real importance! Others see computing, bio-technology and personal communication as being major changes which will drive productivity growth for decades.
Recently: UK trend growth was revised down from 2.5% to 2.25% pa in the late 1990s because of the impending retirement of women born in the 1960s baby boom but revised back up to 2.5% because of the rise in immigrant workers, since the extra labour allowed the economy to grow faster without inflation.
However the main concern is with low productivity – recent rises in output have been accompanied by a significant fall in unemployment but productivity (output per person), which determines living standards, has stagnated. As a result, although UK GDP has risen by approximately 7% in the last 8 years, GDP per head is only about 1% higher. The productivity gap between ourselves and the rest of the G7 has risen to 20%. According to Sir Charlie Bean, former Deputy Governor of the Bank of England (and OB) some of this is due to poor measurement, particularly associated with the rise of the digital economy and the use of technology which is not adequately recorded, e.g. downloading music compared to purchasing a CD or using google maps rather than buying a road map. However, some is due to low investment, some is due to “zombie” companies only able to survive because of current very low interest rates.
Since the Brexit vote, there is concerns that the UK’s growth rate will decline, caused by demand factors, such as future difficulties in selling exports in the EU, and supply factors, such as a shortage of skilled labour. Nevertheless, following the vote, growth has accelerated and is estimated to be 2.2% in 2016 the highest in the G7 (although fall to 1.4% in 2017). Unemployment is at 4.8% the lowest level since 2005, the FTSE is at a record high and the 15% fall in sterling has boosted exports. But inflation is rising and is likely to exceed wage growth in 2017, reducing real living standards, and the ratio of consumer debt to income has started to increase. Business investment fell 2.2% last year and is predicted to fall again this year by 1.75%.
UK growth: The last government’s view was that we raise productivity by focussing on 5 areas.
- Raising investment – both private and public. The UK has low investment as a share of GDP. Macroeconomic stability and business expectations are important in promoting this. Government investment in infrastructure is also important.
- Improving the skills of the labour force –focussing on education and adult skills and trying to reverse the UK’s fall in international education rankings.
- Improving Innovation –boosting R & D by providing tax credits
- Promoting Competition – UK now doing well on international comparisons
- Promoting Enterprise – we do as well as France & Germany but lag behind the USA. The government has tried to stimulate enterprise, particularly in disadvantaged areas.
Develop the UK’s physical infrastructure to meet the needs of business with a £5.5 billion capital package and support for long-term private investment, including in new roads, science infrastructure and free schools. HS2 is also aimed at helping growth.
Increase intervention via a new industrial strategy – the Catapult Programme – puts money into sectors where the UK leads the way in research and there is potential to progress the ideas into marketable products. In this respect we are copying Germany, France, Sweden, China, etc. The Government has established the Technology Strategy Board which decides which industries to “catapult” and where the centres will be based, such as the High Value Manufacturing Catapult near Coventry. Other centres focus on regenerative medicine, offshore renewable energy, satellite applications, transport systems, cities of the future and the digital economy.
This is a change because we moved away from direct intervention after its failure in the 1970s (e.g. Concorde & De Lorean cars) but the manufacturing sector has experienced a major transformation over the last 20 years which has meant, despite previous failures, that there is now a role for an industrial policy. Modern manufacturing has become vertically disintegrated, more flexible in the customisation of products and there now is much greater ‘digital connectivity’ between companies and sectors. Businesses are increasingly connected, linking different factories to produce final products more efficiently, machines are getting smarter, sensing when a tool breaks and changing the tool, reducing the need for supervisors. As a result, many unskilled jobs will disappear but manufacturing previously outsourced to low wage countries might return to the UK. 3D printing will reduce the minimum efficient scale of production, allowing more small plants to operate, moving businesses closer to customers. The Government has committed £150m over 5 years to the manufacturing sector to try to ensure we are prominent in this field. The Catapault Strategy should also allow the various bodies involved (central & local government and industry to work more closely together.
A UK problem is in transforming research into products which can be sold. For example UK academics lead in the field of stem cell research but we are poor at transforming the ideas into therapies so research is often sold overseas. The Catapault Strategy will, hopefully, remedy this.
Create one of the most competitive tax systems in the world by reducing corporation tax which will attract businesses into the UK and encourage investment.
Devolve a greater proportion of growth-related spending to local areas and provide a further £350 million towards the Regional Growth Fund. Since the change in Prime Minister, the “Northern Powerhouse” approach has been replaced with an industrial strategy aimed at the whole country.
Ensure business, particularly small ones, can access finance and support. The Government is creating a Business Bank to deploy £1 billion of additional capital and enable UK Export Finance to provide up to £1.5 billion in loans to finance small firms’ exports. There is also a need to encourage shareholders to take a longer perspective than at present which will allow businesses to devote more funds to R&D and long-term projects, and therefore raise long-term profits, without having to worry about the reduction in the short term profits and the dividend.
Invest an additional £980 million in schools and provide an additional £270 million for capital investment to improve (FE) colleges. There are also curriculum changes e.g. coding being taught in schools.
One-In, Two-Out Rule – the government is aiming for a ‘One-In, Two-Out’ rule for new domestic regulation.
Before Brexit, George Osborne aimed to increase exports to £1 trillion, maintaining the UK’s position as the primary location for new inward FDI in Europe and becoming the main destination in Europe for new FDI from emerging markets. However this will all depend on the results of the Brexit negotiations.