The Chancellor said today that the future is bright and that he is building a Britain fit for the future. But that’s not what it looks like to many people, including economists. The uncertainties of Brexit – which have already cut growth and raised inflation – are just the tip of the iceberg. As the IPPR Commission on Economic Justice has comprehensively shown, the UK economy has deep structural weaknesses which make the future look very precarious. Unfortunately, the measures announced by the Chancellor today are nowhere near adequate to address the problems we face.
Let’s start with jobs. Though the Chancellor now acknowledges the 1.4 million unemployed, he leaves aside the two million on long-term sickness benefits. Even among those in work, the labour market is beset by increasing levels of insecurity. There are now around 900,000 people on zero-hour contracts, a five-fold increase on 2007 levels. Surveys suggest that about 8% of workers are under-employed, meaning they are seeking to work more hours than are currently available. And 15% of the workforce is now classified as self-employed, some of them – as recent court cases have showed – in ‘bogus’ forms of self-employment designed to allow employers to escape paying a range of benefits.
More widely, high employment levels have not led to an increase in average real wages – as economists would expect they would. Indeed, the reverse has happened. Average real wages declined by 2.6% between 2007 and 2016, compared to an average increase of 6.4% in developed countries as a whole. If present trends continue for the next four years, the UK will have experienced the longest period of earnings stagnation since the 1860s. This depressing prospect confirms what so many voters seem to have been saying in the EU referendum and the general election: the economic promise of higher living standards has been broken.
Insecure, low paid work not only sucks demand out of the economy but is contributing to the UK’s stalled productivity growth. When you effectively hire low-paid workers by the hour, firms face little incentive to invest in the equipment and training that could raise productivity. Productivity has barely grown since the financial crisis and is now 13% below the G7 average (measured by output per hour). This is not about how hard we are working: low productivity results from the UK’s low levels of investment in people and infrastructure. Overall investment is now more than 5% below the OECD average.
Flat-lining investment by the private sector is a particular problem. Investment in fixed assets, like land and buildings (but not including construction) fell from 11% of GDP in 1997 to 8% in 2014. In comparison, the level in the USA is 12%. This means that investment is now lower than the rate of depreciation, meaning that the UK’s stock of capital – all those things that produce goods and services – is actually declining. Of particular concern is that spending on research and development – the engine of growth – is lower than in almost our major competitors and has also stalled over the last decade. These are the signs of decline, not of a vibrant economy looking to the future.
Low investment is partly to do with the low share of manufacturing in the UK economy. This also contributes to our trade problem. The UK has had a current account deficit exceeding 2% of GDP in 15 of the last 16 years. The depreciation of the pound in the wake of the EU referendum result has raised exports a little, but not as much as one might expect. This is because the UK remains reliant on a very small number of exporting sectors – notably in professional services and finance – and many of our exporting businesses rely heavily on imported components. This means that some of the benefits of lower export prices are eaten away by the rising cost of imported parts.
These structural problems are compounded by the deep geographical imbalances that have constrained our economy for so long. A combination of the economic impacts of globalisation and skewed public infrastructure spending has seen London and the South East grow while other regions have been left behind. This has led the UK to become the most geographically unbalanced economy is Europe; London and the South East now produce almost 40% of all UK output, and productivity and earnings are almost a third higher than in most of the rest of the country.
So the UK economy has deep structural weaknesses. In turn these problems hinder our ability to address the challenges facing the economy over the coming years – even without Brexit. There is the deeper challenge of our trading positon in the global economy, with emerging economies increasingly able to compete in markets for services and new technologies. As automation, artificial intelligence and other technologies emerge over the next few years, there is a risk inequality will accelerate as employment patterns are changed. An aging society will put huge pressure on public spending, in health and social care and pensions. And global environmental change continues to put natural systems under critical stress, threatening the preconditions of future prosperity.
It is for all these reasons that the IPPR Commission on Economic Justice has called for a fundamental reform of economic policy. Tinkering at the edges of economic policy will simply not address either the inherited problems of the past or the challenges of the future. ‘Fundamental reform’ sounds like a big ask. But reform of this kind has happened twice before in the last century. After the Great Depression and Second World War, Keynesianism and the welfare state initiated a new era of economic growth. After the oil shocks and economic crises of the seventies, free market economics revolutionised both economic thinking and policy.
Today, 10 years after the 2008 financial crash, we are living in a comparable period of breakdown in the economic settlement of the last few decades. This is the moment for new, radical policy options to be debated. Over the next year, the IPPR Commission on Economic Justice will seek to define a new economic model fit for the 21st century. We will offer bolder prescriptions than the Chancellor felt able to announce this week.
This article was originally published on Huffpost.