The New Serfdom

by Angela Eagle

  THE WEAKNESSES WE MUST ADDRESS

  The UK has many deep structural weaknesses in its economy. To overcome these weaknesses we need a radical industrial strategy. It must also be designed to meet the formidable structural challenges that lie ahead.

  LOW SKILLS, STAGNATING PRODUCTIVITY AND LIVING STANDARDS

  Productivity is one of the most important measures of any economy; it tells us how much we produce per person in a defined period of time. The level of productivity is directly linked to the living standards of the economy and indicates the potential for raising wage levels over time. The capacity for growth in that economy is also directly linked to its productivity levels. If productivity is improving, there will be economic growth. Growth will increase wages and also therefore government tax revenues. To establish a virtuous circle, some of the proceeds of that growth must be used to increase the levels of public investment in skills and infrastructure, which will in turn usually increase productivity levels. Lower productivity levels create the opposite, a vicious cycle of lower growth, lower wages and therefore lower tax revenues and less investment.

  Historically, the UK has achieved around 2 per cent growth in productivity a year. However, our performance since the global financial crisis in 2008 has been the worst in the club of G7 nations that make up the largest economies in the world. Productivity growth in the UK has stalled. In the second quarter of 2017, it was still 0.5 per cent below the level it achieved in the second quarter of 2007. This means that, in the interim period, the UK has lost close to 19 per cent of its ‘trend productivity growth’ – i.e. the amount by which we could have expected to see productivity grow if previous historical trends had been maintained. This stagnation and loss of the potential for economic growth has severe consequences for the UK’s economic prospects and for the living standards and prosperity of all our people. (Stagnant productivity was the reason the OBR downgraded its growth forecasts so significantly in the run-up to the November 2017 Budget.)

  Even more bad news for the UK is that while our productivity stagnates, our competitors are improving theirs. So the UK is falling further behind in what this government used to refer to as ‘the global race’. French and German workers can produce in four days what a British worker produces in five, but this is rarely the fault of our workforce. After all, British workers work the longest hours in Europe, but they are less supported by investment in new technologies, modern management techniques and access to the best education and skills training. Our underfunded national infrastructure also lets them down.

  On the supply side of this equation, we have an ineffective skills system and a chronic lack of private sector investment in new plant and machinery. Investment in education, skills and more modern equipment are needed to improve our stagnating levels of productivity and ensure that Britain finally gets the pay rise it deserves.

  In its recent survey of adult skills, the OECD revealed that an estimated 9 million adults of working age (16–65) in England have low literacy or numeracy skills.63 That is over a quarter of the entire workforce. While England was average for literacy, it scored well below average for numeracy. Worryingly, in the UK, young adults performed no better than older workers, which was an unusual pattern not seen in other countries, where general levels of education had improved the prospects of younger cohorts of workers over time. The OECD study found that one third of all 16–19-year-olds have low basic skills, which is three times more than those countries who do best, such as South Korea, Japan, Finland and Holland.

  On the demand side, the government has failed on public investment in road networks, super-fast broadband and social infrastructure, such as nurseries, childcare and social care for elderly relatives. This social investment enables those – mainly women – with caring responsibilities to participate fully in working life. Such social investment improves the productive capacity of the economy and the earnings power of individuals, who then become more productive than would otherwise have been the case. A win–win for individuals and society. The OBR has shown that government spending on infrastructure has fallen in real terms by £20 billion since 2010. Meanwhile, the private sector has gone on an investment strike, citing uncertainty over Brexit for its most recent reluctance to invest (though it always seems to use some kind of ‘uncertainty’ as an excuse for not investing).

  For the UK to achieve success in the future, both public and private investment need to rise sharply if we are to kick-start our stalling levels of productivity. No industrial strategy can succeed without tackling this fundamental weakness and the structural reasons for it.

  REGIONAL IMBALANCES

  The UK is now the most regionally unbalanced economy in Europe. The extent of it is staggering: almost 40 per cent of all output in the UK is generated in London, yet 70 per cent of the population live outside of the London area. As the IPPR noted in its recent discussion paper on industrial strategy:

  Output per head in London is more than twice that of most of the rest of the Country. In no other Nation or Region of the UK is productivity above the national average. Median incomes in the North West, West Midlands, South West and Wales are more than 30 per cent lower than in London and the South East: In Scotland over 20 per cent lower.

  In the absence of any government action, this geographical polarisation will become more pronounced over time – as is the case with London and the south-east today. Geographical polarisation starts because growing regions have better infrastructure and so attract more investment and job opportunities. This in turn tempts those who live in poorer regions to migrate to the area where the economy is strong in search of better career prospects. But this outward migration from economically weaker regions impacts detrimentally on the economic potential of the regions they left behind. Success leads to investment, which leads to more success; neglect and decline leads to less investment, which leads to more decline. Public-sector infrastructure investment is a case in point. IPPR analysis in 2014 showed that £5,426 was spent on each resident of London compared to a mere £223 on those in the north-east region. That’s over twenty-four times as much. The cost of London’s Crossrail project alone is nine times the infrastructure spending the government has planned for the North East, Yorkshire and Humber and the North West put together. The size of such disparities in public infrastructure cannot be justified and can only be explained by the government’s abdication of its proper role in planning for fairness and regional development strategies.

  There have been longstanding regional disparities in the UK at least since the nineteenth century. The over-centralisation of the UK’s political, legal and administrative systems in the capital has made this even worse. However, it was the advent of Thatcherism and the Big Bang in London that caused the gap between London and the rest of the country to begin widening more quickly. The deindustrialisation that was also a feature of Mrs Thatcher’s period in office hit the north and the Midlands particularly hard, stalling their economic prosperity. London’s dominance of finance, banking and insurance drove its accelerating growth from then until the global crash in 2008, while the north was left suffering relative decline. At the same time, Mrs Thatcher centralised local government finance and even abolished the metropolitan councils in big cities because they tended to be Labour-run and represented alternative centres of power that threatened her hegemony. This exacerbated the problems of the already over-centralised political system, making it far harder for devolved local economic initiatives to succeed. Both for reasons of social equity and economic efficiency, it is now vital that government policy has as a central aim to narrow significantly these large regional disparities in economic performance. To its shame, the coalition government abolished the regional development agencies in what they claimed was a cost-saving exercise in 2010. This set back even further the prospects of strong regionally based economic development, making the geographical imbalances worse and harder to challenge. We still do not have a regional structure that is robust or democratic en
ough upon which to build regional economic strength. We need to introduce one and quickly.

  ECONOMIC IMBALANCES

  The UK economy is unbalanced in other ways too. Manufacturing has declined in Britain far faster than it has in other industrialised economies. It suffered greatly during the 1980s when the dominance of the post Big Bang financial sector kept the pound at a level which suited the City but hit manufacturing hard. As a consequence, manufacturing is now too small and too narrowly based on just a few leading sectors. And there is a long-term and growing deficit in the current account (the difference between the value of the goods we import and the goods we export). As we leave the EU it is this deficit which if left unaddressed threatens to be more serious than our borrowing and debt levels for the future wellbeing of the country.

  Our economy is now too reliant on consumer spending for growth, and because wages are falling in real terms, this spending is underpinned by rising levels of unsecured household debt. This is an unstable model for growth that cannot be sustained. A successful industrial policy has to change this by ensuring that the economy can grow in more sustainable ways. Removing our reliance as an economy on consumer spending to stimulate future growth requires a positive manufacturing strategy to be a part of the solution.

  ENVIRONMENTAL IMBALANCES

  The UK economy needs to decarbonise if it is to meet the international obligations it signed up to as part of the Kyoto Protocol in 1997 and the Paris Climate Accord in December 2015. As the first industrialised economy, the UK has recognised that it has a special obligation to lead by example in the battle to avoid the threat to all life on earth posed by ‘man-made’ global climate change. In recognition of this historic industrial legacy, the last Labour government led the way in seeking to develop an international global response to the challenges currently facing the world’s ecosystems. The UK was the first country to pass a Climate Change Act which enshrined our obligations into law, and while this has been watered down since Labour lost office in 2010, the basic framework remains in place. Since 2006, when the Stern Review was published in the UK, there has been widespread acceptance that, if left unchecked, climate change will cause average global temperatures to rise by 5 degrees from their preindustrial levels. The report showed that if this were to happen it would have a profound effect on all life on earth, causing a mass extinction of up to 40 per cent of all current species, rising sea levels, more extreme weather, floods, drought and famine. These phenomena would impact on the world’s poorest and most vulnerable the hardest, even though they have benefited least from the economic development which has caused this problem in the first place. The aim of both national and international policy to counter this severe threat must be international collective action to reduce man-made greenhouse gas emissions into the atmosphere. This means decarbonising our economy. There also has to be mitigation to deal with the unavoidable effects which cannot now be stopped. We must also organise for adaptation to the new realities implied by climate change in areas such as flood protection and the creation of food crops which are more adaptable and have higher yields to protect the human food supply.

  Decarbonisation requires a major restructuring of our economy and our entire way of life, which cannot simply be left to the market spontaneously to conjure up. Our energy supply and the infrastructure needed both to generate and distribute it require a complete and radical overhaul which only governments can oversee. The Paris Agreement implies similar progress in decarbonising our transport systems, industrial processes and agriculture as well as the systems for heating and cooling our living and working environments. And these obligations provide a major mission which must be at the centre of our industrial strategy in the future. There are great opportunities just waiting to be grasped in this important area. Estimates for the UK Committee on Climate Change, which was created to advise on achieving the goals set out in the Climate Change Act, indicate that the green economy is likely to grow at a far faster rate than the overall growth rate for the economy as a whole. This means that the more clean and green we can make the economy, the faster it is likely to grow. The new industries of the future will be low-carbon technology and the innovation required to make the switch from carbon-based energy sources such as oil and gas to renewable sources such as wind and solar is in the process of being developed now. There will be innovations to help decarbonise the human footprint which we cannot yet anticipate but we should certainly plan to develop and deploy. The rewards for successful innovation in this crucial growth area will be worth pursuing.

  Pollution and climate change itself are examples of so-called externalities. Even classical economic theory recognises the presence of such externalities as market failures, which require government intervention and international agreements to fix. This is because the cost of cleaning up the effects of pollution or climate change caused by man-made greenhouse gasses do not fall on those who caused the problem in the first place and so these costs cannot be recognised by the price mechanism. Those suffering from famine due to the failure of the rains were not the ones who benefited from the industrialisation that changed global temperatures and altered the weather patterns. Moreover, we all owe an obligation of good stewardship of our planet to future generations, as well as its current inhabitants. We therefore have obligations which extend outside of the territories of our own countries, across time to future citizens, and to the other species with which we share this planet. Market forces are simply not able to accommodate the requirements necessary to be successful in this multidimensional context. This has to be achieved by political will, international agreement and a recognition that – far from the radical individualism that Hayek asserted – we are actually all interdependent, thus a collective response to challenges is often crucial in overcoming them.

  AN OVERLY CENTRALISED STATE

  As a prerequisite for a much-needed geographical rebalancing of economic activity in the UK, there needs to be a radical decentralisation of economic and administrative power from national government and from London downward to the regions. This alone will not solve the disparities, but it will be a part of the solution. Such a decentralisation has been called for in the past, but it has never been delivered in an effective way in England. The last Labour government was far too tentative when it sought to balance out devolution settlements for Scotland, Wales and London with a modest programme of devolution to the English regions. Part of the difficulty has been the absence of a powerful regional administrative structure in the UK. And the fact that devolution has worked for Scotland, Wales and London but has failed in the English regions has paradoxically made England’s geographical disparities harder to tackle. While devolution has provided Wales and Scotland with some of the policy levers they need to begin tackling the problems caused by the economic dominance of London and the south-east, these imbalances are too stark for any quick or simple solution to be implemented. It will take relentless focus to achieve a geographical rebalancing and it will also require joint working between all levels of government to deliver it. Thus far there’s no sign that the Treasury is willing to loosen its vice-like grip on central government expenditure, much less go into a genuine partnership with other tiers of government, be they the devolved administrations or local government.

  The Regional Development Agencies which emerged from the last Labour government’s modest decentralisation proposals were a mixed bag, with budgets derived from existing funding allocations being devolved down for regional strategic decision-making, which meant they were widely divergent in size and effectiveness. The Regional Development Agencies were based on definitions of English regions which were often more administrative than real, politically, culturally or economically. And it was clear from the beginning that some regions had more of a sense of identity and a willingness to work together than others. When she was a minister in John Prescott’s sprawling Department for the Environment, Transport and the Regions, Angela was responsible, with Dick Caborn, for piloting the
legislation that set up the Regional Development Agencies through Parliament. It was accepted that some regions would have a stronger sense of identity and a larger budget to work with than others, but it was hoped in time that the administrative devolution could be followed by political powers, too, as well as the creation of democratically elected Regional Assemblies, which would hold the administrative structures to account and allow them to take on wider responsibilities over time. This legislation was designed to be the beginning of a process of rebalancing economic activity out of London. The subsequent loss of the referendum to create an elected assembly in the north-east was catastrophic for the evolution of the RDAs into more democratic structures and this loss was a huge setback for any meaningful form of devolution of real powers to the English regions. In the absence of this progress to a more legitimate democratic oversight of their activities, the RDAs were left with an important administrative role that was still useful in bringing together the regional economic players and created strategic development plans that were far more locally based than anything that would have emerged from Whitehall. Some RDAs were making further progress by combining in order to fulfil wider strategic aims, such as transport. For example, the three northern RDAs – North West RDA, Yorkshire Forward and One North East – had combined to form The Northern Way.