Britain desperately needs a growth strategy

The UK “muddles through”. That was the theme of an excellent recent book by Duncan Weldon. Yet muddling through is no longer enough. This was the argument of my column a week ago, which was based on Ending Stagnation, a report from the Resolution Foundation and the Centre for Economic Performance at the London School of Economics.

Britain is suffering from a poisonous combination of stalled productivity and high inequality. This combination means that “typical households are 9 per cent poorer than their French counterparts while our low-income families are 27 per cent poorer”. Not surprisingly, six in 10 Britons “think the country is heading in the wrong direction”.

So, how might it be put in the right direction? The shockingly un-English answer the report offers is that it needs an economic strategy. It would be wrong to say that the country has never had such a thing before: it had one in the world wars, under Attlee and again under Thatcher. But the kind of strategy this book recommends would be new. It is not to be implemented under the shadow of a world war or during its aftermath. Nor, as Thatcher’s was, is it to be focused on shrinking the state’s economic footprint. This strategy demands an active state in peacetime. That would at least be novel.

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The case for a new economic strategy is not just the dismal economic performance since the financial crisis of 2007-2008. It is also that the pre-crisis economy was, at least in part, an unsustainable bubble. It is, in addition, that the country confronts so many challenges beyond slow growth and high inequality. These include adjusting to Brexit, financing and implementing the green transition, reducing regional inequality, spending more on defence, and managing the pressures of ageing.

It is widely believed that economic change has been speeding up. Nothing could be further from the truth. The reallocation of labour between sectors is at its lowest in over 90 years. The UK needs faster change. Hitherto, much attention has focused on raising the productivity of mediocre firms. High-productivity sectors and firms must expand, instead, so squeezing labour, land and capital out from sectors and firms where they are currently being wasted.

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“No one celebrates it,” states the report, “but the UK is the second-largest exporter of services in the world.” The report duly argues that skill-intensive service sectors, in which the UK has a revealed comparative advantage, should be a priority. These include exports of intellectual property and cultural, business and financial services. The UK also has an advantage in sophisticated manufactures, such as aerospace. The country, in brief, has to build on what it is already good at, not dream of becoming a country it is not.

Bar chart of Proportion of workers aged 18-64 by their highest qualification,  UK, 2011-2019  showing The UK's most valuable sectors depend on university graduates

So far, so apparently sensible. But this priority mostly looks ideal for skilled professionals working predominantly in London. What would it mean for the less skilled and those living elsewhere? One answer would be that these people and places would provide non-tradeable services to those providing globally tradeable services. But that would not be enough. So, the report also recommends huge public and private investments in Birmingham and Manchester, in order to close a good part of their productivity gap with London, by increasing their business capital stocks by 15 to 20 per cent and their populations by over 160,000 graduates each.

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Meanwhile, the benefits would be spread across the wider population by making jobs better and offering a more proactive public safety net. The former would involve raising minimum wages, enforcing labour standards, encouraging unionisation and so squeezing out the low-productivity businesses. Support for temporary unemployment and acquisition of skills would be more generous, in order to encourage workers to take the risk of moving to better jobs. In this, the model is Danish “flexicurity”, in which the state supports workers, rather than existing jobs.

A crucial element would be higher public and private investment, with the latter financed in part by higher pension contributions. This investment would also need to be in skills especially at below-degree level. Buttressing all this would need to be substantial liberalisation of the UK’s restrictive planning regime as well as tax reform, including not least taxes on property and wealth.

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I admire the strategic vision. That is such a welcome change from the usual cramped debates. Equally welcome is recognition that things cannot go on as they are. Yet this raises two big questions.

The first is whether it has enough of a growth and levelling-up strategy. It should have focused more on growth of new and innovative businesses. It should also have given a clearer idea of how the promotion of high-wage services would generate incomes across the country. It could surely end up, instead, concentrating more population and wealth in London and the South East.

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The second is whether any strategy that would unfold over at least two parliaments and in practice over more could be implemented in the UK. The report rightly notes that Germany produced a spectacularly successful strategic response to the national emergency of unification. The difference is not so much that the UK does not do this sort of thing. That is not quite right, given its wartime mobilisations. The difference is rather that the UK has become accustomed to managing stagnation: this frog is being boiled too slowly. I hope I am wrong. But when I take a look at our politics, I fear I am not. The debates are too timid. Nevertheless, Resolution deserves credit for seeking to persuade the country and its politicians to jump out of the pot in time.

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