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The Progressive Policy Think Tank

BLOG: A long-term non-ideological approach to economics

IPPR Economics Prize runners up blog

Businesses and investors have a much greater chance of success when they have a clear long-term strategy and stick to it throughout the swings of economic fortune. The same is true of national economies too.

Social market economics as practised by countries such as Germany recognise the crucial role of both private sector and government in the economy. Maintenance of sound public finances enables this approach to be pursued consistently throughout the economic and political cycle. In Germany’s case, the long-term results have certainly been impressive. 

The Winter of Discontent in 1978 and the neo-liberal economic revolution, which followed under Margaret Thatcher, began a cycle of different ideological approaches to economics practised by the major UK political parties. This caused the frequent changes in strategy and the large and unsustainable swings in public spending. Since 1979, there has also been an increasing lack of confidence and belief in the ability of government to play its full and proper role in the economy. 

The long-term results of the UK’s approach are increasingly clear to see. Investment levels of 16.5 per cent of the economy is more than 3 per cent less than the average for major economies. The UK has invested less than other economies every single quarter since 1995. Productivity growth over the last ten years is thought to be the worst since the Industrial Revolution, and overall productivity is now more than 25 per cent below that in Germany. The trend rate of growth has declined consistently and is now little more than 1.5 per cent per year. 

Our entry to the IPPR Economics Prize makes the case that reversing this decline requires much greater emphasis on investment by both public and private sector. The required policies need to be implemented consistently and gradually. Increases in public sector investment need to be targeted towards areas which have a positive impact on private sector productivity.

First is the transport network – crucial in getting people to work and goods to market. Regional and rural transport must be prioritised over “vanity” projects such as HS2. Second is vocational training - expanding the numbers going to university should never have been at the expense of the development of practical workplace skills and this balance needs urgently addressing. Third is social housing – the collapse in council house building in the UK and the current lack of affordable rental housing are clearly related and must be reversed.  

Increases in long-term private sector investment will only be achieved by a range of complementary policies. The exchange rate must be set at a level which makes the UK a competitive place for businesses to base. Rather than simply setting low corporation tax rates, the tax system must also specifically incentivise the desired behaviour – investment in plant and equipment and research and development (R&D).

After we have left the EU, the UK will have the chance to set an ambitious regional policy once again away from EU state-aid rules. Significantly re-vamped Enterprise Zones and Free Ports can offer very attractive incentives to invest. 

R&D is a key area where private and public sectors must co-operate. The model of private sector innovation businesses working closely with universities must be developed further. Public R&D stimulates rather than crowds out that in the private sector.

This long-term shift towards investment would provide a significant boost to the UK’s economic prospects, but it is vital that the fruits of growth are seen by all. It is crucial that the required constraint of consumption growth falls on the shoulders of those most able to bear it. With this in mind, an increase in the living wage so that it exceeds the OECD definition of low pay should be implemented, and a luxury rate of VAT to ensure that those who consume conspicuously pay the major share of tax. 

A successful investment-led ‘social market’ economy, in which government and private sector both play their rightful roles, is the key to improving the UK’s disappointing economic performance. This will be a long-term non-ideological approach to economics which should be welcomed by politicians across the spectrum.

Read the full IPPR Economics Prize runner up report here