Road to economic recovery means rebalancing the economy post Covid-19
In the wake of the Prime Minister’s recent proposals for economic recovery after the lockdown, including measures to boost infrastructure construction, the UK entrepreneur and economist with a life-long political background in the Labour Party, John Mills suggests in a new report that the UK economy will be faced with a number of disadvantages which will make recovery especially difficult.
The major UK challenges…
In his report, The Road to Recovery: Reviving Manufacturing after Coronavirus, John Mills sets out why, as result of unwise policy decisions taken over a long period, the UK economy will be poorly positioned to recover from the Covid-19 pandemic:
- Our economy is currently unbalanced and the underlying growth rate is low.
- The proportion of our GDP which we invest in the future is far below the world average and what money we do spend is not on the right projects.
- We have deindustrialised to a greater extent than any other advanced economy, with dire consequences for regional balance, good steady job prospects, increases in productivity and our ability to pay our way in the world.
- The author describes that “…almost all public sector investment – in roads, rail, schools, hospitals, public buildings and housing – however desirable from a social standpoint, produces overall returns to the economy which are little more than the interest costs needed to finance them. They therefore contribute little or nothing to economic growth.”
- John Mills identifies that the root cause of our problems is over-reliance on services at the expense of manufacturing.
- For many years we have run our economy with a relatively high exchange rate which suits the City and our service economy – but too strong a pound has been lethal for siting manufacturing facilities in the UK. It has made it impossible to invest sufficiently in the categories of investment which really drive productivity, particularly mechanisation, technology and power.
- “Our economy”, argues Mills, “has been left deeply unbalanced, unable to pay its way in the world, with too much borrowing and with mounting regional, inter-generational and socio-economic inequality.”
The report highlights the need to rebalance our economy, particularly around manufacturing and investment. To achieve a successful recovery from the pandemic, we desperately need a stronger manufacturing base to rebalance our economy both to recover from Covid-19 and to pay for the mounting costs of climate change, health and social care, pensions and training.
Without that policy, we run a major risk that UK living standards will be lower in 2030 than they were in 2019 or even 2007. The real choice we now have in front of us is between export- and investment-led growth or import- and debt-led stagnation. Mills makes several recommendations:
- GROWTH RATE: “The target proposed in this pamphlet is an increase of about 2% per annum above current expectations once the main recovery from Covid-19 has taken place. This would bring our growth rate up to an average of around 3.5% per annum instead of the 1.4% average we have seen recently.”
- INVESTMENT: “The key to grasping how to achieve this objective is to appreciate the crucial role of investment and, in particular, its most productive categories, in generating economic growth.”
- TECHNOLOGY: For John Mills, it is because the UK has such low net expenditure on crucial categories of investment – in mechanisation, technology and power – that we have such a poor record on productivity, while we tolerate stagnant real wages and low economic growth.
- MANUFACTURING: “If we are ever to rebalance our economy by at least a reasonable measure of reindustrialisation, it has to be profitable to site new manufacturing capacity in the UK rather than elsewhere.”
- JOBS: The report shows that manufacturing is better than services at generating well paid steady jobs across the income, ability and responsibility spectrum. The UK has far too much low paid, insecure and low productivity service sector employment.
- REINDUSTRIALISE: “Reindustrialisation is not only needed because it is much easier to secure productivity increases in manufacturing than in services, and thus to increase overall growth; it is also vital to rebalance the economy between its regions.”
- EXCHANGE RATE: “The most critical of all [factors] is to get the exchange rate down – and to keep it there – at a level which makes it profitable to invest in a reasonably wide spread of internationally traded manufacturing in the UK.”
- RETHINK OLD RECOVERY STRATEGIES: “It may be that we shall attempt to achieve this recovery along broadly familiar lines, with the pound much too high for manufacturing to flourish.”
- PROBLEMS WITH OLD RECOVERY STRATEGIES: “The risks are then a prolonged and slow recovery from Covid-19, accompanied by increasing cost pressures while the UK economy becomes even more unbalanced, its growth rate falters, and living standards decline, probably quite steeply.
- BE COMPETITIVE, NOT FOLLOWING DEBT-LED STRATEGY: Mills concludes, “…recognising the need to make the UK economy more competitive, and taking the necessary action to make it happen, may be a much safer course of action than ploughing into another decade of import- and debt-led stagnation.
The Road to Recovery