A hung parliament. Inflation going up but growth slowing. A divided nation ill at ease with itself. Welcome back to the 1970s, like now a time when Britain was forced to take a long, painful look at itself.
Make no mistake, this is a good thing. Whether you are in favour of hard Brexit, soft Brexit, clean Brexit or no Brexit, it should be clear that there is something fundamentally wrong with the economy. The same old problems keep surfacing: too small an industrial base; too much debt; too great a geographical divide between the rich south and the rest of the country; too many poorly paid low-productivity jobs.
Ministers boast about the underlying strength of the economy but reach for the wrong 1970s David Bowie reference when they suggest everything is hunky dory. It’s more a case of always crashing in the same car.
In the 1970s, both left and right were agreed that the economy required fundamental changes. The Conservatives had Thatcherism, a blast of the free market designed to shake Britain out of what was seen as corporatist complacency; Labour had the Alternative Economic Strategy built around nationalisation, planning agreements between state and industry, and reflation behind tariff walls.
Thatcherism won that battle and not since has there been the desire to do anything remotely as radical. In the 1980s, it was possible for Britain to convince itself that the financial sector could fill the hole left by the decline of manufacturing. But the big bang in the City was not the solution. In the 1990s, the economy had a purple patch when the big devaluation of sterling after departure from the exchange rate mechanism coincided with strong world growth following the collapse of communism. But globalisation too proved no panacea.
By the 2000s, Britain’s economic model involved attracting hot money into the City of London, which kept the pound nice and strong. An overvalued exchange rate meant that cheap imports from emerging markets such as China became even cheaper. Inflation was duly tamed, which meant that the Bank of England could keep interest rates low. The availability of easy-terms credit encouraged people to load up on debt in order to buy houses, which rose sharply in value, making people feel richer even though they weren’t really. This approach crashed and burned in the crisis of 2007-08, which should have been the time for a rethink. Regrettably, the bad old habits proved hard to break.
Halfway through the 2010 parliament, David Cameron and George Osborne had a problem. They had arrived in office promising a different economic model that would be less dependent on private and public debt, and the result was that taxes were raised and public spending was cut to rid Britain of its budgetary incontinence. Businesses would be encouraged to invest by the commitment to reduce the budget deficit, while the Bank of England’s easy money regime would ensure that the economy kept growing at a reasonable pace.
Things didn’t work out as planned and the reason they didn’t was that Cameron and Osborne failed to understand just how structurally weak the economy was. They assumed that it wouldn’t really matter if consumer spending was flat and the housing market a bit depressed because growth would pick up elsewhere – in manufacturing, exports and investment – to compensate.
But there was no rebalancing. Without the consumer and the housing market, it was not a case of different growth, it was a case of no growth. Fearful of losing the 2015 election, steps were taken to get the housing market moving.
Five years on, Theresa May and Philip Hammond have the same problem. Consumers are being squeezed by higher inflation and have already run down their savings. Activity in the housing market has stalled because the mini-boom set off by Cameron and Osborne has run its course. Across large parts of the country, property has become unaffordable.
But, as in 2012, there is scant evidence of the other bits of the economy picking up the baton. Surveys of manufacturing have been strong in recent months but the hard official data has been weak. Exports were up in the latest quarter but not by nearly as much as the government might have hoped given the fall in the value of sterling. As ever, UK manufacturers are finding it hard to resist the temptation to take advantage of a cheaper pound to raise prices rather than to secure bigger market share.
So that’s the position. Rightly, the Bank of England is getting a bit concerned about the levels of personal debt that it has helped to generate by almost a decade of ultra-low interest rates and copious amount of quantitative easing. Geographically sundered, Britain is in the curious position of simultaneously having the problems both of a developed country and a developing country: overheating in London and the south-east, the need to nurture growth in the rest of the country.
These deep-seated issues require structural change, which is why industrial policy is back in vogue. The government’s green paper on the subject was published in January and set out 10 areas for attention, including upgrading infrastructure, encouraging inward investment and skills, and cultivating world-leading sectors.
But as a new report to be published on Monday points out, the vast majority of the actions detailed in the green paper were things the government was already doing or were modest initiatives already in the pipeline.
The one notable exception, according to a paper by Steve Fothergill, Tony Gore and Peter Wells of the Centre for Regional Economic and Social Research at Sheffield Hallam University, has been investing in science, research and technology. Here, there has been some new money: Hammond announced almost £5bn of funding for R&D for the period up until 2020-21.
But as the report details, the R&D spending is being targeted at a narrow range of sectors – healthcare and medicine, robotics and artificial intelligence, batteries, self-driving vehicles, materials for the future, and satellites and space technology.
This approach – picking winners by any other name – has the attraction of being at the cutting edge of change. The downside, Forthergill, Gore and Wells note, is that these sectors account for employment in only a tiny fragment (around 1% of the economy) and 10% of jobs in manufacturing.
What’s more, the money will be heavily channelled to those parts of the country that are rich in R&D centres: an arc to the immediate north, west and south of London.
The report concludes, rightly, that the government’s focus is too narrow to provide a basis for the revival of British industry. It will be great for Cambridge, which has twice as many scientific research and development jobs as the whole of the Midlands, and more than Scotland and Wales combined. For the bits of the country that really require help, it will be a god-awful small affair.
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