With the graphs to prove it
The Government’s Spring Statement tommorow will provide an important window on state of the UK economy.
Brexit continues to dominate the headlines but even without the fallout from the EU referendum, there are serious challenges facing the health of the economy.
A quick look at some of the economic trends of the past few years reveals some worrying signs on productivity, investment and the strategic challenges ahead.
We stand on the edges of a new economic era of automation, greater use of technology and different expectations from a younger generation.
Whilst much of the commentary on the day is likely to focus on short-term ups and downs of the public finances, it is these deeper challenges that we should be focusing on.
Here is our take on the 5 challenges facing the UK – with the graphs to prove it:
1.Economic growth continues to be disappointing
UK economic growth has been disappointing expectations for several years.
Once upon a time, it was thought that the UK’s underlying or trend growth rate was around 2.5 per cent a year – and that is roughly what the Office for Budget Responsibility was expecting in 2015. But by the time of its last forecast in October, it didn’t see growth getting much above 1.5% any time soon.
That forecast assumed a reasonably smooth Brexit. Forecasts for the impact of a “no deal” scenario vary widely.
The “consensus” average of independent forecasts predicts a slowdown to less than 1% growth this year. Others predict outright recession (negative growth). The Bank of England’s “worst case” scenario envisages a contraction of almost 8 per cent – sharper than that following the 2008 financial crisis.
2. Productivity remains the elusive path to growth and shared prosperity
If you can put Brexit aside for a moment, the biggest challenge for UK prosperity is absolute and relative productivity.
But here is the sting: UK productivity has been stagnating for the past decade.
A number of economies have seen poor productivity growth in recent years, but the UK’s slowdown has been among the worst, leaving us poorly placed among comparable economies.
3. It needs to be all about research and development
Improving the UK’s productivity performance will need higher levels of investment in innovation and infrastructure, an active and effective public sector, and more engaged and empowered employees. The UK starts from a weak position on all these things.
Since the 2015 Spending Review, total business investment has fallen short of expectations by more than £150 billion.
This loss of anticipated private sector investment dwarves the additional public investment funded by the Chancellor’s new “National Productivity Investment Fund”, which amounts, so far, to less than £12 billion.
A particularly important component of both public and private investment for raising productivity is research and development (R&D).
In its 2017 manifesto the Government promised to “meet the current OECD average for investment in R&D – that is, 2.4 per cent of GDP – within ten years”.
However the latest figures from the OECD show UK levels of R&D actually falling slightly in 2017, while the OECD average continues to rise.
Government agencies and the wider public sector have a critical role to play in driving productivity improvements – both through their own R&D and by creating the right conditions for private sector innovation and investment.
4. Austerity has actually harmed the economy, not improved things
The state’s role in stimulating and supporting the economy has been hobbled by a decade of crude austerity measures.
The latest analysis from the Institute for Fiscal Studies shows that, even accounting for recent allocations of additional money in response to the pressures of Brexit or other short-term crises, in many areas such as the environment or transport, current budgets have been cut by more than a third in real terms.
This has translated into deep cuts in capacity and capability at vital public bodies and agencies – many of which play a key role in advancing economic as well as social or environmental goals.
The impact of cuts to budgets and staffing levels have been further compounded by a crude public sector pay policy that has cut the real value of civil service salaries by over 15 per cent since 2010, resulting in acute skill shortages in key areas.
Despite announcements of the end of public sector pay restraint last year, public servants working for Government departments and agencies saw the cap on pay raised to just 1-1.5% last year.
Repairing this damage must be the key task of this year’s Spending Review, work on which will begin in earnest once the Spring Statement is delivered.
5. Future growth needs to involve the workers – productivity and engagement go hand-in-hand
Finally, as well as increased investment and an effective public sector, a key missing piece in the productivity puzzle is worker voice.
Here again the UK falls behind. A 2010 comparison of levels of worker participation across Europe found that UK workers had the second lowest level of representation in company decision-making.
Recent work by the Institute for Public Policy Research found that this ranking correlated noticeably with R&D and productivity as well as income equality.
More recent evidence published last year by the latest Skills and Employment Survey found that on measures of employee autonomy and influence that correlate significantly with productivity, the UK is moving backwards.
As the lead researchers conclude:
“Channels to greater productivity are at their most effective when employees have: more autonomy to decide how to do their jobs; more supportive line management; more meaningful appraisals; and their views and those of their colleagues are heard.
However, since 2006 these productivity drivers have become less prevalent, precisely at a time when productivity growth has been sluggish and the economy would have benefited from them most.”
An economy in which workers have a stronger voice will not only be more innovative – it will be one in which the disruptive effects of technological and industrial change are more fairly managed, and the proceeds of increased productivity and growth more justly distributed.
Martin McIvor is an Economy Research Officer at the Prospect trade union
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