The low rate of growth of productivity reflects, among other things, weak investment and the slow adoption of new technology
The low rate of growth of productivity reflects, among other things, weak investment and the slow adoption of new technology © Chris Ratcliffe/Bloomberg

The 2020s will determine whether we have a chance of averting irreversible damage to the climate. But, for the UK, this comes together with other big challenges. Its response will also determine what happens to the wellbeing of its people. Dominic Cummings’ brutal testimony this week suggests that its leadership’s ability to deliver is very much in doubt.

The Resolution Foundation and Centre for Economic Performance of the London School of Economics have, to their credit, just launched an important inquiry into The UK’s decisive decade. It is decisive, because the country must grapple with recovery from Covid-19, the aftermath of Brexit, an ongoing technological revolution and the transition to net-zero emissions of greenhouse gases. Moreover, it does so from a base of stagnant productivity, high inequality, rapid ageing and high debt.

Martin Wolf chart showing Internet sales as a % of total retail sales

Only a frivolous person would assume that this is sure to work out. Remember: in 1987, Italians celebrated il sorpasso, the year when their nominal incomes per head surpassed those of the UK. But today, after two decades of stagnant real incomes, Italy is well behind. Its gap with Germany has become bigger still. Yet over the past decade, UK productivity has also stagnated. If that is not reversed, a declining UK will lose not just prestige, but the ability to give rising living standards to its people.

The report spells out in sobering detail the challenges and the legacy. On the aftermath from Covid-19, for example, there has probably been a permanent shock to high-street retail, a particularly important source of jobs for women. On Brexit, the impact on trade with EU countries is already visible, with little chance that trade with the rest of the world will soon (if ever) offset these losses. On technology, we must assume large and continuing shifts in the structure of employment and competitive pressures, with many firms disappearing. On the transition to net zero, the country must make huge investments well before any gains from lower operating costs become apparent.

Martin Wolf chart showing GDP per capita, relative to Germany

Then there is the dire legacy. The low rate of growth of productivity reflects, among other things, weak investment and the slow adoption of new technology. The report notes that, “In 2017, the UK had only 71 robots installed per 10,000 manufacturing employees, compared to 309 in Germany and 631 in Korea.” Mainly as a result of slow productivity growth, the growth in real household incomes fell from 22 per cent in the 2000s to only 9 per cent in the 2010s. Again, inequality soared in the 1980s and never reversed. As a result, “The UK Gini coefficient [a measure of inequality] is higher than in all countries in the EU, except Bulgaria, and the second highest in the G7”. The UK also has exceptionally big regional inequalities in productivity, which leaves the rather less unequal regional distribution of household incomes dependent on transfers from London, whose most competitive industry, services, has been gleefully sacrificed on the altar of Brexit.

In view of all this, the facile boosterism of the prime minister is a luxury the country simply cannot afford. What is needed instead is the “ruthless truth telling” recommended by Keynes to the then nascent IMF. As the report indicates, the UK has some important assets, notably its language, first-rate universities, a strong science base and largely non-corrupt politics. The government has also already laid down a “plan for growth” that has some welcome elements, including somewhat higher public investment, a plan for life-long learning, a focus on innovation and science and some targets for decarbonisation.

Column chart of Real growth in UK median household income, after housing costs (%) showing A slow decade for growth in household incomes

Yet there is no recognition of the costs of Brexit or of the obstacles to spreading prosperity more broadly. There is no certainty that the needed money will be spent on skills. There are big holes, too, in the plan for decarbonisation. Possibly most important, instead of ideas on how to raise private investment the chancellor intends, after a brief period of generous allowances for investment, to raise corporation tax substantially. This will reduce already low investment. Yes, we will get “freeports”. But these will prove a zero-sum gimmick.

When we look back at Covid-19, we see one blunder after another, partially redeemed by a flash of inspiration: the vaccination programme. But one inspiration will not secure the development of an economy in such challenging circumstances. That takes far-sighted policymaking and resource mobilisation by a competent political and administrative machine in a supportive relationship with a dynamic private sector. It takes policy, not gestures, and respect for reality, not slogans. Is this feasible in the UK? Perhaps. Is it likely? No.

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