As we approach the General Election, politicians are battling over the question of what is wrong with Britain’s economy. The usual suspects are out in force: “benefit-scroungers”, “fat cat bosses”, “price gouging energy companies” to name but a few. What I find frustrating is the lack of substance behind many of these arguments. Rarely is any evidence presented, beyond the odd suspect anecdote, such as immigrants supposedly causing traffic jams on the M40.
By far the biggest problem facing Britain’s economy is low productivity. Productivity is a term economists use to describe how effectively the economy uses its inputs. For example, if the economy can produce the same level of output (GDP) with fewer workers or factories, then it has become more productive. Those workers or factories no longer needed can be used to produce something else. This way, overall output per worker increases, which means everyone should become richer. In contrast, simply building more factories or employing more people won’t necessarily make the economy more productive, even if it leads to an increase in GDP.
Britain’s productivity record is poor. Not only is our productivity – measured as output per hour – below 2007 levels, it has also substantially lagged other post-recession recoveries. It is way below the US, France and Germany, and even trails Italy, according to ONS figures.
But what changes can the government make to correct this problem? Here are three policy suggestions I am confident would help. I am equally confident that none have any real chance of being implemented.
Rip up the Town and Country Planning Act. In the 1970s, Britain built 300,000 new homes a year. Today we build less than half this amount, despite having a larger population and vastly more expensive housing. That is a dysfunctional market. Extortionate housing costs partly reflect our arcane planning system, which stems from the 1947 Town and Country Planning Act that empowered local planning authorities to block new developments. The system worked for a while in the 1950s and 1960s. But in recent times it has served only to protect the interests of those who already own property.
There is no question that this is highly unproductive for the economy. Land is not a productive asset. As prices spiral upwards, those workers who need to find shelter have to pay more for it, in the form of higher rent or mortgage repayments. Firms who employ those workers may also need to pay them more. This raises the overall input cost to the economy – for no good economic reason. In my view, the government should repeal the Act, replacing it with a new system that will ensure more land and housing development so that housing costs start to come down. That so few of Britain’s OECD peers have this problem suggests that it shouldn’t be too difficult to achieve.
Promote more skilled immigration. Ukip would no doubt claim otherwise, but the evidence paints a clear picture. Immigrants are positive for Britain’s economy. A recent study of EU migrants by UCL concluded that they had made a net £20bn contribution to the economy over the past decade. No doubt there are individual examples where the system has been abused (there always are), but this is not the case in aggregate. Immigrants are particularly positive for productivity when they have useful skills. I accept that immigration places pressure on public services. But this is not an argument to stop immigration. It suggests we need to invest more in public services to service healthily growing demand.
Lay off on austerity. It surprises me that all the major parties agree on the necessity of achieving a balanced budget. It sounds very responsible, and it is – if you are a household or a company. But the government is in a very different position. It has the power to tax, spend and borrow. Currently, the government can borrow money for 10 years at 1.8 per cent and for 30 years at 2.5 per cent. This is an exceptionally low cost of capital, and certainly does not indicate any current funding difficulties.
We often hear politicians say that austerity is necessary to avoid tax increases. But this is only the case if money is spent unproductively. Long-term capital projects such as better infrastructure, public services or scientific research are very likely to pay for themselves through higher productivity, GDP and tax revenues in future years. The government should take advantage of low funding costs and make these investments now, or provide incentives for others to make them. This is not to suggest that we should go on an irresponsible spending spree; ultimately, the fiscal deficit will need to come down. But it is possible that this could be achieved through future economic growth rather than simply cutting spending today.
I hold little hope that any of these policies would be seriously considered by politicians. Property speculation is so endemic that rocking the boat with controversial policy change seems unlikely. Meanwhile, the rise of Ukip in the polls has terrified the main parties from saying anything sensible on immigration. And it seems even Labour has become a convert to the balanced budget mantra.
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