In it for the long haul?
This week’s OECD release provides yet more grim reading for Chancellor George Osborne. It shows that over the last year the UK’s stuttering economy has grown at a slower rate than every G7 advanced economy except battered Japan, which is contending with the aftermath of the fifth largest earthquake ever recorded, not two mention two decades of economic stagnation, a public debt mountain that dwarfs Britain’s, and continued political paralysis.
If that is not sobering enough for Osborne, the release also notes that while the average GDP of the 34 countries that belong to the OECD was 1.6 per cent higher in the second quarter of 2011 compared to a year ago, Britain managed an increase of just 0.7 per cent, less than half the OECD average. Even Italy, which has experienced chronic growth and a swelling debt pile over the past five years and now finds itself in the firing line of the financial markets, performed better (up 0.8 per cent).
To their credit, David Cameron and the Government have always said that the recovery would ‘take time’. In light of recent gyrations in global stock markets, we should ‘set our expectations accordingly’ for the long and arduous road ahead, Osborne warned in a recent speech to Parliament.
In a way they are right; economics isn’t just about quarter upon quarter activity, but about actions that are taken over, and for, the long term. But, this is precisely where the Government comes unstuck. Its stubborn determination to eliminate the structural fiscal deficit within 5 years, coupled with the fanciful assumption that growth will automatically follow, is, aside from looking increasingly unlikely (as the IMF has pointed out), characteristic of the short-term mentality that pervades current economic debate in this country.
Even when we are through this present crisis, there is a real risk that we will still be an economy unfit to fight the big, long-term global economic battles ahead. As a new report published this week by IPPR and written by myself and Adam Lent shows, the UK is a serial under-performer compared to our major competitors on those OECD, IMF and other international economic indicators that are most vital for successful competition in the global market place.
On investment in business, on skills, on innovation and productivity, and on presence in emerging markets – all core features of an adaptive, forward-looking economy - we are decidedly mediocre and, in some cases, worse than mediocre when compared to similar OECD and G7 countries.
Rather than investing heavily in new enterprise and productive capacity, we consistently post the lowest investment rates as a percentage of GDP in the G7. Rather than having a powerful strata of inventive and cutting-edge companies, only 46 per cent of our businesses innovate compared to 80 per cent in Germany and 50 per cent in France. Rather than providing for a strong supply of skilled labour, twice as many adults in the UK have no or low qualifications than in Germany and three times than in the US. And, rather than exporting our way into the most dynamic and emerging markets, today less than 7 per cent of British exports are destined for the BRIC economies.
With this profile, even if the economy does manage to get back on track sooner rather than later, we will find it exceedingly difficult to adapt to two major economic shifts that are afoot and likely to intensify in the coming years and decades. These are the changing constellation of global economic power and the vigorous entry of confident new players from the East into global markets, and the revolution in business practices and markets being ushered in by new web-based technologies. Faced with these challenges, there is a real risk that Britain will once again fall behind, as it has done in the past.
In the first half of the twentieth century, British industry responded slowly to the rise of the US and mass production techniques and lagged our more responsive and innovative European counterparts, while similarly in the 1960s our share of global markets diminished as Japan emerged and pioneered flexible modes of production. If we are to avoid repeating the problems of the past, policymakers must take steps to tackle these difficult shortcomings now, not in a few years or decades time, or even put them off indefinitely.
But what answers does Osborne have? Thus far, a recipe of limited tax cuts, changes to employment law and planning regulations, and an expectation that by getting Government out of the way, the private sector will blossom. Our research suggests that successful nations do not follow this piecemeal and ideologically motivated template, but instead focus on what works. In doing so, they recognise the clear need for active Government intervention to put in place the key fundamentals underpinning steady and sustained growth.
To start with, the Government should look to Germany, France, the Scandinavian economies and, yes, even the USA, and their use of state-led financing facilities to support the types of investments that corporate lenders consider too risky. Fortunately, the Cabinet is not completely adverse to this concept, having given the go ahead to the Green Investment Bank, which will sponsor low-carbon industries and technologies. However, the ambition and scope needs to be widened. With £15 billion in upfront capital, a ‘British Investment Bank’ could raise an extra £200 billion on the markets to support a more diverse range of innovative businesses and costly infrastructure projects. This would help spur growth across a wider range of sectors, help reduce our dependence on financial services and property, and help achieve the Government’s aspiration of ‘rebalancing’ our economy.
By putting in place this foundation, as well as additional measures to improve the provision and demand for skills, foster business innovation and support export-seeking enterprise, Britain’s has a fighting chance. If not, then we will find ourselves firmly in the slow lane as other countries exit the crisis, and will rue the missed opportunities that – if they had been taken by this generation of decision makers - would have enabled the UK to survive and prosper in the Asian Century before us.