In a recent report, the IPPR’s Commission on Economic Justice laid out a far-reaching critical evaluation of the UK’s model of capitalism. Here, one of the contributors to that work, Mathew Lawrence, presents some of the dominant economic obstacles that stand in the way of greater prosperity and justice in Britain today.
British capitalism is deeply dysfunctional. We are in the middle of the longest stagnation in earnings for 150 years. Young people today are set to be poorer than their parents. We have the richest region in Europe – inner London – but most British regions are now poorer than the European average. The UK’s productivity performance has been abject for a decade. The cumulative environmental impacts of our economy are damaging and unsustainable. These are not short-term effects but rather the symptoms of deep and longstanding structural economic weaknesses. In short, our economic model is broken and needs radical reform.
Fundamentally, the economy no longer delivers rising living standards for the majority of people. As IPPR’s Commission on Economic Justice points out, average weekly earnings have decoupled from GDP growth for the first time since comparable data has been available.
Of course, stagnant living standards is only partial. The pre-tax, pre-benefit incomes of the poorest half of the population barely benefitted from overall economic growth since 1979. By contrast, the richest 10 per cent took almost 40 per cent of the total. While the bottom fifth of the population saw their real incomes increase by only just over £10 per week between 1997 to 2017, the top fifth saw their increase by just over £300 a week. The incomes of high income households are also forecast to rise an estimated 11 times faster than the incomes of low income household between now and 2030. Clearly, our economic model still works for some.
Stark regional inequalities also mark the UK, the most geographically unbalanced economy in Europe. London and the South East are responsible for almost 40 per cent of total UK output, and are the only regions of the country with productivity higher than the national average. Median incomes in the North West, West Midlands, South West and Wales are more than 30% lower than in London and the South East.
Injustices in distribution partly reflect inefficiencies in production. Productivity (output per hour) in Q2 of this year is just 0.9% higher than a decade ago, the worst result for a ten-year cycle for 200 years, and productivity is 15.4% below the G7 average. Only 3 of the UK’s 168 NUTS3 regions in the UK have a higher productivity rate than the German average. While 1% of firms have had average productivity growth of around 6% per year, a third of UK companies have seen no rise in productivity throughout since the turn of the millennium. UK firms on the frontier of technology and innovation are world-leading, but in the everyday economy we have a long tail of companies pursuing low-wage, low-productivity business models.
The UK’s labour market has also become increasingly insecure and ‘casualised’, in part driving the growth in low-pay, low-productivity work. Fifteen per cent of the workforce are now self-employed, with an increasing proportion in ‘enforced self-employment’. Six per cent are on short-term contracts, and almost 3 per cent are on zero hours contracts. More workers are on low pay than 10 years ago. One consequence of the growth in insecure work is increasing mental ill-health. While many people have good, well paid forms of work, the labour market is failing too many people.
Similarly, despite the Brexit rhetoric of a free-trading Britannia waiting to be unleashed, the reality is our trade deficit remains almost 3% of GDP and we have the largest current account deficit of all G7 countries. This suggests that we approach our exit from the European Union in a position of relative economic weakness.
Of course, the UK has areas of real strength and tremendous endowments to build upon. Overall though, it is a story of sustained over-confidence matched by continued under-performance. The foundational institutions and policy frameworks of the British economy underpin this. Our highly flexible labour markets and shareholder-centric model of corporate governance lead to low levels of private investment, which is 5% below the OECD average. Our financial sector is one of the world’s largest, yet is failing to support the real economy. Loans to UK business account for just 3 per cent of all banking assets, with the majority of lending as real estate loans and mortgages that do not increase the productive capacity of the economy or raise wages, but do drive destabilising asset price inflation.
Britain’s poor performance on investment, productivity and inequality stem in part from how – and in whose interest – British companies are governed. The UK comes sixth from bottom in terms of guaranteeing formal participation and governance rights for employees among EU countries, a situation that undermines voice at work. Deep power imbalances in the workplace and wider economy have contributed to labour’s declining share of national income.
All this has occurred despite pursuing bold heterodox monetary policy since the financial crisis, with the injection of £445bn of quantitative easing and interest rates at 0.25% still not enough to restore dynamism. In part this is because, counter-productively, fiscal austerity has withdrawn demand from the economy, reduced much needed investment, and caused real and unnecessary hardship for many.
The profound challenges confronting the economy in the decades ahead make the case for thoroughgoing reform more compelling. Brexit is the most obvious disruptive force, and whatever relationship emerges with the EU, it is bound to have critical implications for our future prosperity.
Yet even as the UK negotiates its new place in the world, an accelerating wave of economic, social and technological change will reshape the country, in often quite radical ways. Globalisation will continue to shift economic power towards the Global South and reshape the architecture of the global economy. An ageing society will weigh on the capacity of public services and the health of the public finances. Automation and digital platforms threaten to accelerate inequalities as absent new models of common ownership, technological change concentrates returns to capital and imperils labour’s position. The ‘shock of the Anthropocene’ will overarch this. The damaging aggregate human impacts on the Earth’s natural systems mean many critical global and local environmental thresholds are likely to be breached in the 2020s. These include destabilising climate change, biodiversity loss, disruptions to nitrogen cycle, air pollution and global habitat loss. Ensuring we live safely within the Earth’s “planetary boundaries” will require a transformation in the way today’s economies are organised, as Jason Moore’s recent PERC lecture attested.
In this context, sticking with the status quo is the radical option; far better to undertake the hard but necessary transformation of our economic institutions underpinned by a new national economic vision and policy framework. The goal of IPPR’s Commission on Economic Justice is to develop that content, to help build an economy where prosperity is joined with justice.
Mathew Lawrence is a Senior Research Fellow at the IPPR in the Economy team. He works on the IPPR Commission on Economic Justice, leading on the intersection between economic and technological change, political economy, and workplace democracy. He is Editor of IPPR Progressive Review, which he helped design and relaunch in the summer of 2017.