Life After Brexit?

Although we are no clearer about how, when or even if the UK will be leaving the EU, it is worth considering areas the UK government must address in order to make the best not of the next few months, but of the next decade.

Two months ago, in the World Economic Forum’s annual report on countries’ competitiveness, the UK slipped down two places to eighth out of 140, with the top places held by the USA, Singapore, Germany, Switzerland, Singapore, the Netherlands and Hong Kong. The WEF, best known for its annual Davos conference, takes a wide-ranging view of competitiveness, considering such things as infrastructure, macroeconomic stability, health, skills of the labour force, the financial system and the quality of universities.  Although the UK did well in areas such as workforce diversity and the quality of our legal institutions, we dropped down the table because of poor health provision and a lack of investment in ICT-related infrastructure and human capital.

Although the UK currently has record low levels of unemployment, our productivity (output per hour) compared to our competitors is low and this correlates with the WEF comments about our low investment in human capital. In the 1980s our productivity growth averaged 2.4% pa, in the 1990s it was 2.3% pa, in the 2000s it had fallen to 1.4% pa, largely due to the financial crisis, and, since 2010 it has averaged 0.5% pa. If we had been able to maintain the productivity growth of the earlier decades before the financial crisis, UK GDP would be about 20% higher than at present. However, despite all the attention paid to productivity in recent years, the situation might not be as bad as predicted. A recent OECD reports suggests that the UK has over-estimated the number of hours worked by not fully accounting, among other factors, for the increase in part-time work. Nevertheless, it still remains that if UK workers are to get richer, then the country must produce more, either by working longer or becoming more productive.

One area which will need addressing to boost productivity is research and development (R&D). Our R&D spending has been a lower proportion of GDP than many competing countries with the UK spending only 2/3 as much as a percentage of GDP as Germany, Japan and the USA. However the government has committed to increase this to 2.4% of GDP by 2027, up from 1.4% today, and has created a Productivity Investment Fund worth £31bn to assist. It has already committed £7bn with 600 projects receiving funds but there is still scope to increase this.

Another is business investment which, for the last twenty years has been among the lowest of OECD members, not helped recently by the uncertainty in the economy. From 1997 to 2017, gross fixed capital formation in the UK (capital expenditure by the public and private sectors, e.g. spending on factories, plant and machinery, transport equipment, software, new dwellings, and improvements to existing buildings and roads) averaged 17% of GDP pa compared to 21% in Germany and the USA and 25% in Japan.  It is particularly weak in the low wage sectors of the economy and, ironically, it is possible that a decline in inward migration might encourage investment in these sectors if the supply of cheap labour dries up in the future. Low corporation tax and generous tax allowances and grants will be crucial in boosting our investment but, as well as generous financial assistance, businesses will be seeking a guarantee that the tax regime  will be stable to allow them to plan for the future.

A third area which needs addressing is infrastructure. Although the UK has delivered some successful infrastructure projects (e.g. London 2012), our record is not good. Crossrail is likely to be delayed even further and cost more than predicted, estimates for HS2 are increasing and London airport expansion seems stuck in an eternal holding pattern. Not only does such investment increase our productive potential, it also creates a very powerful stimulus to aggregate demand since so much of the cost remains in the UK economy in terms of labour and raw material costs, creating a powerful multiplier effect. Note that while we have been considering expanding Heathrow’s airport capacity by one airport, China is aiming to increase its number of airports from 207 in 2015 to 260 by 2020. There is also a feeling that too much infrastructure has been focused on the South East and a recent development which might help to address the imbalance is the appointment of regional mayors. The seven current mayors argue that transferring more power and resources to them will increase growth and improve productivity in their regions. They want more control over public services including skills, training and apprenticeship services, and the programmes designed to help people get back to work. They also want greater control over how tax revenue is spent, rather than relying on Government grants and control over any regional funds set up to replace EU funding.

A final key area to address is the level of skills of the workforce. A variety of solutions have been proposed such as boosting STEM subjects, improving management training and improving the status and quality of vocational training. Technical qualifications have traditionally been seen as inferior to the more academic A’levels and degrees and the introduction of the Apprenticeship Levy, intended to increase the number of apprenticeships, coincided with a decline in their number. However the most recent data suggests that this fall is being reversed as employers become more familiar with the new scheme. With a likely decline in the number of skilled migrants entering the UK from the EU, this area will be key if the UK economy is to prosper over the next decades.

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The Population Crisis

According to popular legend, the science of economics was christened “the dismal science” by Thomas Carlyle following the publication by Thomas Malthus in 1798 of “An Essay on the Principle of Population”. In this he suggested that poverty and hunger would be a country’s natural state since increases in population would tend to outstrip increases in food supply. Fortunately he was proved wrong as birth rates fell and new techniques increased the supply of food and the science of economics moved on.

We are currently focused on short-term issues such as Brexit but it is worth taking a longer perspective following the publication of a report in ‘The Lancet’ which has highlighted falling fertility rates across the world between 1950 and 2017. The reasons behind the fall include better education and employment prospects for women, improved access to contraception, better maternal education for mothers and prospective mothers and improvements in infant mortality. As a result, 91 out of 195 countries have been identified as having a fertility rate below 2.05 – the minimum necessary for stable population growth. For example, in Britain over the period, the fertility rate fell from 2.2 to 1.7.

The implications of falling fertility rates in richer countries, partially masked by inward immigration, focus on the conflict between increased life expectancy, creating an increased number of elderly pensioners receiving benefits and increasingly needing expensive medical care, and a falling supply of workers who are paying taxes to support the elderly. These workers will therefore face a greater burden in terms of the taxes they will need to pay to support the elderly.

This is already significant in Japan where 28% of the population are over 65, the highest proportion in the world, compared with 18% in the UK and 22% in Germany. One offsetting feature in Japan is that people often work on beyond their retirement age – 3% of their labour force is over 80! Although it is not suggested that working until 80 becomes the norm, the retirement age in many countries is being increased as a result of increased life expectancy and, in the UK, it will reach 66 by October 2020 and 67 by 2028 for both men and women. This will reduce pension payments and increase tax revenue but, alone, is unlikely to be enough to prevent developed countries facing increasing budget deficits to finance care and benefits for the elderly.

As this crisis unfolds, the people who will suffer most are not the elderly but younger generations who will not only be working longer and paying higher taxes but will face student debt and higher house prices than experienced by their grandparents

Olen niin iloinen

For those of you who do not speak Finnish, a clue to the meaning of the words above might be found in the following questions.

What happens on 20th March 2018?

Answer – UN has declared it to be World Happiness Day

What do Norway and Burundi have in common?

Answer – they both dropped in the UN World Happiness Report. Burundi dropped to bottom place while Norway dropped out of the top slot to be replaced by Finland – hence the Finnish comment “I am so happy”.

The Report ranks 156 countries by their happiness levels, and, this year, it also looked at 117 countries by the happiness of their immigrants, with Finland coming top in both rankings.

The top and bottom 10 are recorded below. A sample in each country are asked to score their happiness on a scale of 10 (most happy) to 1 (least happy) with Finland scoring 7.6 and Burundi 2.9. In order to identify the reasoning behind the score, the report also looks at economic strength (measured in GDP per capita), social support, life expectancy, freedom of choice, generosity, and perceived corruption. The biggest loser was Venezuela, dropping 2.2 on the scale, which is little surprise considering the state of their economy. This year the study also looked at the happiness of migrants,

It is worth a warning note about the numbers – the difference between the top 6 countries is only 0.191 on the 1 – 10 scale.

The world’s happiest – and least happy – countries 2018 World Happiness Report
Happiest Least happy
1. Finland 147. Malawi
2. Norway 148. Haiti
3. Denmark 149. Liberia
4. Iceland 150. Syria
5. Switzerland 151. Rwanda
6. Netherlands 152. Yemen
7. Canada 153. Tanzania
8. New Zealand 154. South Sudan
9. Sweden 155. Central African Republic
10. Australia 156. Burundi

Tory plans mean no one will be left to build homes | Michael Thirkettle | Housing Network | The Guardian

Theresa May’s migration target will intensify the UK constructions skills crisis and scupper her plans for affordable homes

Source: Tory plans mean no one will be left to build homes | Michael Thirkettle | Housing Network | The Guardian

Nearly 12% of construction workers are migrants, increasing to 45% in London. The Conservatives, at the time of writing, have pledged to reduce migration to the tens of thousands in order to appeal to the popular vote. However, with the number of workers leaving the construction industry outstripping the number of apprentices (future workers), construction firms will face severe shortages. Expect wages to rise (due to supply constraints) and some pretty intense lobbying by construction firms to loosen visa restrictions for certain trades.

The significant differences between the proportion of migrant workers in London relative to the rest of the UK is a good example of geographical immobilities. Migrant workers are more ‘footloose’ and willing to move to where the work is.

I suspect other industries, such as health care and hospitality, will follow, making the setting of migration targets rather pointless.