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Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
The writer is the author of the book ‘Growth: A Reckoning’ and an economist at Oxford University and King’s College London
The British economy is in trouble. There is no Rasta. Productivity, which is already below the US, Germany and France, is falling. Real wages barely moved for 16 years, their worst performance since the Napoleonic Wars. And investors are beginning to waver, pushing borrowing costs to their highest level in 16 years.
How did Britain get into this mess – and how did it get out? It is hard to imagine a more important issue for the country. However, the new Labor government has still not given a convincing answer. Instead, their focus was on a handful of economic messages that created useless traps for themselves and actively harmed growth.
In the opposition, the message was “no tax on working people”. Perhaps it was politically useful, a defense against warnings that they would search the voter packages. But his presentation fell flat, mired Labor in weeks of esoteric debate about the true meaning of the word “work”. Even worse, keeping the promises in power kept economy back.
This is not a good time to put the bulk of a huge £40bn tax hike – the biggest since 1993 – to work. Small companies are inside drop. The number of new start-ups has been falling for five years. Unemployment is stubbornly high. And the fallout from the eventual increase in National Insurance – polls suggest higher prices and lower wages will come – actually looks like a tax on workers.
Another message prevailed in the office: Britain faced a “black hole” in its public finances. This could be interpreted as fiscal irresponsibility, requiring new borrowing rules and transparency measures. But instead Labor presented it as a fiscal overspend, repeatedly stressing the enormity of the deficit (“£22 billion”), convulsing in unconvincing argumentative gymnastics to avoid the obvious solution of its own framework – more austerity.
And again, none of that helped growth. Week after week we were told about the disastrous state of affairs in Britain, how “tough decisions” and “difficult choices” lie ahead. All this unrelenting pessimism crushed the agitated animal spirits of the land.
“The government,” noted former Bank of England chief economist and FT editor Andy Haldane, “has produced fear and foreboding, uncertainty. . . which is unfortunate because immediately after the election there was a sense of refreshment, a sense of renewal.”
The closest the government has come to diagnosing what has gone wrong is their latest message: we must “fix the foundations”. It is true that Britain is failing to do the basics. We have a backlog of several million houses to be built. The application process for the Lower Thames crossing – a tunnel under the river – cost twice as much as it actually cost to build the world’s longest road tunnel in Norway. We haven’t built a nuclear power plant in three decades, and our next one — Hinkley Point C — is six times more expensive than the one in South Korea.
In the pursuit of prosperity, however, it is not enough to simply repair the foundations. Britain must also build the future.
Little we know about growth is that it comes not only from old-fashioned investment in roads and houses, but also from new ideas, innovations and technological advances. This points to a deeper diagnosis of what has gone wrong in Britain: it is not just that these old-fashioned investments are stagnating, but that these other parts of economic life that drive growth are also faltering.
Companies struggle to innovate, filing far fewer patents than rivals in Europe and elsewhere, with private R&D fall as a percentage of GDP. British universities don’t help, they do a great job of producing academic research (57 percent more publications per capita than the US) but are consistently poor at putting those ideas to productive use.
The City of London, the traditional source of British vitality, looks exhausted. While the total value of companies on the London Stock Exchange has fallen since 2007, the value of US stocks has tripled. Moreover, the industries that chose Britain are obsolete. The five largest companies in the UK by market capitalization are mostly from the old-school sectors: oil, mining, finance, chemicals. in OURdominated by Apple, Nvidia, Microsoft, Amazon, Alphabet.
And we know that the technology sector is really important for growth. In the US, it is almost entirely responsible for the country’s astonishing productivity — three times pace in the Eurozone and the UK since 2008-09. That’s why this week’s AI “action plan” for the UK is encouraging: AI will be the most important technology of the 21st century and the UK has the most valuable AI sector in Europe. It must now build on that, engaging the political leadership and financial resources needed to turn the 50 recommendations in that plan into reality.
Three hundred years ago, Britain thundered past its rivals because of a fresh spirit—ready to take risks, enterprising, aggressive in discovering new ideas about the world, steadfast in their practical application. It is this spirit that we need to nurture again.
