We need to invest directly in new industries, promote equitable distribution of income and wealth, reform corporate governance and take action on dead-weights dragging the economy down.
Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.
The UK economy is at the bottom of the G7 growth table. The real average wage is unchanged since 2005 and people are facing the biggest fall in living standards since the 1950s. Rather than redistributing income and wealth, curbing profiteering and the state directly investing in social infrastructure and new industries, political elites blame it on low productivity of labour.
A common measure of labour productivity is output per hours worked and depends on skills, infrastructure, investment, supply chain resilience, state policies and much more.
Between 1974 and 2008, the UK’s productivity grew at an average rate of 2.3% a year, and declined to around 0.5% between 2008 and 2020, and has stagnated since the pandemic. Rather than addressing systemic problems, former Prime Minister Liz Truss blames workers by claiming that “the British are among the worst idlers in the world.”
Actually, Brits work longer hours than many of their European counterparts. For example, in 2022 average annual hours worked by a German worker were 1,341 compared to 1,532 for a Brit. Yet, productivity of a German worker is up to 19% higher. Greater investment in skills and assets is a key reason.
Investment in productive assets is lower in the UK than any other G7 country. During the EU years, the UK was near the bottom of the investment league. It invested around 16.9% of its GDP into productive assets, and has remained low since then. In 2021, the UK ranked 27th on business investment among the 30 OECD countries This is despite periods of low inflation, interest rates, corporate taxes, high incentives and negative real wage growth.
Private sector investment is some £354bn less in real terms compared to the G7 median position from 2005 to 2021. Diminishing real incomes of the masses and short-termism are major reasons. Workers’ share of GDP in the form of wages and salaries has declined from 65.1% in 1976 to around 50% in 2023. This constrains people’s ability to buy goods/services and limits investment.
The UK is a major financial centre but the City of London looks for short-term returns, which is aided by a shareholder-centric model of corporate governance. The Bank of England Chief Economist noted that in 1970 major companies paid around £10 in dividends out of each £100 of profits, but by 2015 the amount rose to between £60 and £70, often accompanied by a squeeze on labour and investment. That trend has continued.
Private sector never really had the appetite for long-term risks. The state filled that void by investing. After the Second World War, public debt was around 270% of GDP and enabled the government to rebuild the economy. The entrepreneurial state (re)built shipbuilding, railways, steel, water, gas, electricity, mining, and many other industries. The state directly invested in the emerging biotechnology, information technology and telecommunications as the private sector did not have the appetite for it. No one fretted about debt and by 1976 proceeds of prosperity reduced it to 49% of GDP.
From the late 1970s, neoliberals restructured the entrepreneurial state and it became a guarantor of corporate profits, as shown by the Private Finance Initiative (PFI), privatisations and outsourcing. Public investment remains neglected. Privatised industries have rarely provided the promised investment. For example, water was privatised in England in 1989 on the claims that this would lead to higher investment in infrastructure, but by 2023 not a single new reservoir has been built. No new industries have been started. If the UK public sector had emulated the G7 median practices over the period 2006-2021, an additional £208bn in real terms would have been invested.
The UK productivity is damaged by dead-weights in the UK economy. The bloated and scandal-ridden finance industry is one such example. We all need bank accounts, insurance, pensions, credit/debit cards and sundry financial service, but the City engages in destructive activities such as frauds, mis-selling, money laundering and unrestrained gambling, which may enrich a few but brings no benefit to society. For example, hedge funds made profits on £1.6bn by speculating on price of food and drove up prices. Bailouts and subsidies have been normalised. The City attracts graduates, which then starves other sectors of skilled labour. One study estimates that between 1995 and 2015, the finance industry made a negative contribution of £4,500bn to the UK economy.
Accountancy is another bloated sector. The UK has nearly 400,000 professionally qualified accountants, the highest per capita in the world. They enjoy the state guaranteed market of external audit and insolvency, amongst other things. Yet financial reporting and auditing is poor. There is no freedom from frauds and fiddles. Around a quarter of accountants are engaged in tax-planning, a euphemism for tax dodges. They divert resources from public purse to private hands, and thus hamper social investment and productivity.
The UK’s current economic model is unlikely to arrest stagnant productivity and investment. That requires the state to invest directly in new industries, promote equitable distribution of income and wealth, reform corporate governance and take action on dead-weights dragging the economy down. No political party has shown willingness to do that.