British politics is close to meltdown. The country has embarked upon separating itself from the EU under a prime minister without authority and a government without unity. It would be good if the UK’s economy were healthy. Unfortunately, it suffers from deep weaknesses. Brexit is likely to reveal these more clearly.
The short-term economic performance of the UK is already disappointing. The International Monetary Fund’s World Economic Outlook forecasts growth for the UK economy this year and next at 1.7 and 1.5 per cent respectively, which would put it close to the bottom of the EU league. In 2018, only Italy would be (marginally) below it. Yet this slowdown is not as concerning as the longer-term economic failings, as the interim report from the Commission on Economic Justice of the London-based Institute for Public Policy Research demonstrates.
So what is the charge sheet?
The aftermath of the financial crisis has been devastating. Despite the advantages of a flexible exchange rate and monetary and fiscal autonomy, the recovery has been much the weakest since the second world war. Real median household disposable incomes are just 5 per cent higher than in 2007. Again, between 2007 and 2016, real wages grew 10.6 per cent in Germany and 6.4 per cent, on average, in members of the Organisation for Economic Co-operation and Development. But, in the UK, they fell by 2.6 per cent. Only Greece, Mexico and Portugal had a worse performance on real wages.
A significant generational divide has also opened up. Those aged 22-39 experienced a 10 per cent fall in real earnings between 2007 and 2017. They were also particularly hard hit by the jump in average house prices from 3.6 times annual average earnings 20 years ago to 7.6 times today. Not surprisingly, the proportion of 25-34 year olds taking out a mortgage has fallen sharply, from 53 to 35 per cent.
The UK economy remains the most regionally divided in Europe. Inner London is the richest region in Europe. The other regions (apart from the rest of London and the southeast) are far poorer, though, it should be noted, France, Italy and Spain have regions poorer than the UK’s poorest. Gross domestic product per head has also only regained pre-crisis levels in London and the southeast.
Further, while the UK’s employment record has been good, part-time employment is relatively high and various categories of insecure work have greatly increased. In 2016, for example, 2.8 per cent of all people in employment were on zero-hours contracts, up from 0.6 per cent in 2007. It must be hard for people working under such contracts to have much control over their lives.
The UK’s level of inequality is among the highest in Europe. While overall inequality has not risen much in recent decades (unlike in the US), pay at the top has exploded upwards: 30 years ago, company chief executives were paid on average about 20 times the salary of the average worker. The ratio is now about 150 times. People might wonder, given UK performance, what these business leaders have done to justify such huge increases.
They might also point to the facts that the UK’s average productivity per hours worked is among the lowest among high-income countries and, still worse, productivity has flatlined since the crisis. On both measures, performance is quite close to Italy’s. This dire productivity performance partly reflects the enormously long (and growing) tail of poor performers.
Last, but not least, on this list of failings, UK investment is exceptionally weak by the standards of comparable countries and has tended to fall as a share of GDP for three decades. Spending on research and development is also relatively weak. This, some argue, reflects perverse incentives, which reward management for how far they raise stock prices in the short run, rather than whether they improve the long-term performance of companies.
This is not a vigorous and healthy economy well able to take the shock of substantially worse access to its most important markets. It is absurd to suggest otherwise. The contempt many politicians on the right seem to feel for the UK’s European peers is particularly inappropriate. Policies aimed at improving economic performance across the board are essential, not least because economic disappointment must have been among the reasons for the Brexit vote. Yet the Brexit shock, combined with the UK’s underlying weaknesses, is likely to make the disappointment for many still more severe.
The UK has embarked on a risky voyage in a leaky boat. Beware a shipwreck.
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