They say a week is a long time in politics, but what a tumultuous month or so it has been for Britain and the world. It was political upheaval and changes prompted by some very irresponsible economics. If one includes the leadership changes that went before this most recent one, Britain begins to resemble Italy. Little wonder, The Economist did a recent issue on Britaly.
I didn’t entirely agree with their assessment, even though I do think Britain is probably in one of the most chaotic periods the country has seen in the past few decades. And while the media and commentators were critical of the former Prime Minister, Liz Truss, I wondered if it isn’t a larger malaise within the Conservative Party that is the problem, given that they voted for her.
The turmoil in the financial markets was immediate and sharp, triggered by worries over UK’s already high inflation, and its unfunded spending. Gilt yields spiked, long-term investors sold off, and the British pound tumbled. This caused alarm not only in the financial markets, but among investors, businesses and the general public who were most concerned about the rising costs of energy and inflation which, together have been called the “cost of living crisis”
More than a month later, the Tories voted in the leader they had earlier rejected and the task on damage control has begun. A new prime minister, a new cabinet and the Bank of England rushed to the rescue. However, has the crisis truly blown over? Not in my opinion, as I think the country’s current crisis is not merely this post-pandemic economic one, it is a combination of many crises with roots in the past.
I think the immediate crisis and one that needs urgent attention is the fiscal one, where the government is faced with trying to control inflation, and boosting growth at the same time. The problem is really one of finding ways to grow tax revenue, having spent vast amounts on fiscal stimulus during the pandemic, so that the country has the means to then spend on essential areas to boost growth. They also have a task protecting vulnerable sections of the population, with energy prices soaring in the midst of winter.
The fiscal plan that the Chancellor, Jeremy Hunt, presented in parliament focused on filling the £55 billion shortfall in the budget, according to BBC World News that I watched on TV, with £30 billion being raised through tax increases and £25 billion coming through spending cuts. The bond markets have been reassured for now, but The Economist writes that the government has merely postponed the agony, by shifting the responsibility of delivering spending cuts to the next government, since those take effect only in 2025. Besides, taxes on the wealthy have not been increased, and benefits on pensioners have not been pared down.
The country’s immediate to medium term crisis, and one that got neglected during the pandemic, is still to minimize the adverse impact of Brexit on the economy. This, along with resolving the Northern Ireland problem, requires UK to work closely with the EU. At the moment, Britain and the EU face many similar problems, from the war in Ukraine to controlling energy prices, high inflation, recession and a global slowdown, weakening exports. They can and ought to cooperate on many of these issues and coordinate closely, as their economies are still closely interconnected, even if Britain has left the EU.
Brexit reflects many of the problems within the Tory party, with the extreme right-wing faction holding the rest of the party hostage – and the country, I might add – to their whims and fancies; it was they who forced a Brexit referendum on the country when David Cameron agreed to hold one. Rishi Sunak, as an ardent supporter of Boris Johnson’s Brexit policies, has his task cut out under the present circumstances. He will have to walk back some of his predecessor’s policies, especially the one to do with Northern Ireland, and perhaps negotiate and compromise more with his EU partners. The government will have to tone down the bluster of “global Britain” and “take back control” and instead put its nose to the grindstone and actually concentrate on tackling these huge economic challenges. He also faces challenging tasks in resolving problems with Scotland – that insists on a second referendum – and with Northern Ireland in terms of devolution of powers.
The medium-to-long term crisis that Britain faces is low productivity and lack of competitiveness. The British think-tank, Resolution Foundation is of the view that Britain has been in stagnation, and that low productivity is to blame. It has also been reported that real median wages of Britons have not grown since 2003-04. It is possible that low productivity is to do with certain sectors of the British economy and that rising inequality is the reason behind median wages not growing. At the moment, though, it is soaring inflation that is eating into people’s real wages.
As an island nation that relies on imports for much of its needs, as well as one that needs to find international markets for its products and services, one has to say that Britain has always been global, by default. The question to ponder over is how can the country make the economy work to its advantages. How can it rediscover its competitiveness? India’s GDP might overtake UK’s or France’s – as it indeed had, recently – but Britain’s economic competitiveness, as a mature economy, must be seen in relation to its rich and developed peers, say, the G-7 or OECD economies.
According to what little meaningful and sensible data I could find on the internet, UK’s economy has seen a considerable slowdown since 1997-98. According to the World Bank Britain clocked economic growth rates of 4-5% in the 1980s and 1990s, before slowing down to 3% and less after 1997-98. While Tories and Thatcherites will claim that growth in those two decades were the direct result of Thatcher’s economic policies of liberalization, privatization and breaking labour unions, they must identify what went wrong after the late ‘90s. If anything, Britain would have globalized even more since then, and with the impetus provided by technology and the internet, ought to have maintained a high level of growth.
Britain was hit hard by the 2007-08 financial crisis, but it also escaped the Euro crisis that engulfed most of the continent, and it has no real reason to be falling behind them. In this sense then, the comparison ought to be with the US as well as with Ireland, a country that still belongs to the EU and has gained by attracting big tech companies and others through lower taxes. I must clarify, though, that a low tax regime is not the only, or best path, to economic growth.
In terms of competitiveness the World Economic Forum in its Global Competitiveness Report 2020 (findings for 2019) reports that UK slipped one place to 9th in the global rankings over the previous year. They say that business dynamism and innovation capacity has weakened and that its ICT adoption was the weakest among OECD countries. Besides, reskilling and education also dropped.
According to the ONS, Britain’s annual growth in labour productivity per hour worked was the highest ever in 1973 and 1983 at 4.9%, while the latest growth in labour productivity for 2021 is 1.1%. They also say that labour productivity was higher and grew more in manufacturing than in services between 1998 and 2019, because of a fall in the workforce at lower productivity manufacturing businesses from 1998 to 2008. It is true that productivity would vary by sector and type of business, and ideally, one should be looking at total factor productivity, that takes into account labour, machinery, level of automation and information technology. The Economist writes that Britain’s productivity problem is a long-standing one and they attribute most of the fall in total factor productivity to the 2008 Financial Crisis, when it fell behind some of its G7 and OECD peers.
Britain ought to focus on areas that it has a competitive advantage in, and invest in more R&D as well as commercializing innovations speedily. As an outsider to the UK economy, I think that it has strengths in life sciences, aerospace and defence, financial services, automobile engineering, and higher education. While its financial services sector has suffered somewhat from Brexit, I suppose London is still an important financial centre. I have been reading about their automobile companies not doing too well recently and even suffering from productivity problems, and find that surprising. The entire world of automobiles has been suffering from both a disruption in technology with the switch to EVs as well as a chip shortage post the Covid pandemic, and both ought to resolve themselves over time.
When it comes to British automobile marques specifically, they dominate in the luxury and sports car categories. This category ought to stay quite resilient during economic downturns and recessions. However, it is also crowded, with stiff competition from German and Italian brands. Britain ought to think about how it can differentiate its automobile brands and stay ahead of the competition. For example, German luxury car brands are known for German engineering which has come to mean great precision and finish delivering the smoothest journeys, while Italians are known for terrific power and styling.
I am not sure what the success rate of start-ups are in the UK and how easily they manage to raise capital. Does Britain need to create and build a strong venture-capital sector to encourage new businesses and innovations? More importantly, how do British start-ups or new businesses stay viable and scale up, without getting acquired or drifting into oblivion?
In higher education, Britain needs to go beyond Oxford and Cambridge, the oldest and still best regarded universities globally. Warwick University, for example, started a manufacturing department or stream of study, precisely to encourage innovation in manufacturing and engineering with strong linkages with industry, with which JLR is closely associated. Perhaps it’s time that the UK also considered taking its campuses overseas, especially of specific departments, to key and important markets for advanced education, the way some American Universities do.
I think another new area that will be a huge trillion-dollar industry soon, is clean or green technology and Britain should certainly set itself out to innovate and lead in this field. From green hydrogen and green steel, to developing clean tech across a range of applications, helping to bring the costs down, is the way of the future and UK ought to be an important part of it.
And finally, we come to the consumption sector, especially of discretionary goods, of which Britain produces a fair amount, but doesn’t get due credit for. The UK is known for its retailers, many of whom are located on London’s Oxford Street or Regent Street, and although Britain is often known as a nation of shopkeepers, I think it can do better. The country doesn’t have a luxury industry, the way France and Italy do, but it can build its brands better. There’s Wedgwood and Royal Doulton chinaware, and Shetland woollens, along with Scot Tartans and Argyles. And whether it’s Scotch Whiskies and ales, or fine clothing, Britain ought to do a better job of bringing them together under a uniquely British quality. I think that as a land of enduring traditions, it can stand for enduring value: I had for example suggested on my blog that M&S ought to create a fashion line that leverages its long-lasting value as “unfast fashion”.
Perhaps the Confederation of British Industry can give all this more thought and take it forward. The time has come for UK to think long and hard about its future, having severed its links with the EU. After Thatcher’s reforms of the ‘80s and the reformist New Labour of the late 90s leading into this millennium, Britain needs a new strategy and direction to embark upon. It is strategically placed in the Atlantic between the United States of America and Europe, both of which are its allies. And it is not merely the transatlantic connection that places Britain in a unique position. The entire world sets its watches by the distance from GMT, and this gives London’s financial centre its real power.
Britain is in many ways then, still the centre of the world. It now has to learn to operate in a changed world, though, and make sense of it along with the rest of the world.