Assorted Conservative Party members, of varying persuasions, headed to the city of Birmingham for their annual party conference, between 2 and 5 October 2022, while others chose to stay away. On the final day, Prime Minister Liz Truss unveiled her fledgling government’s priorities, in no uncertain terms. From the podium, appropriately preceded by the pop anthem ‘Moving Up’ by M People, she reaffirmed her commitment to “growth, growth, growth”- to be driven by tax cuts and private sector enterprise- before pointing fingers at the “anti-growth coalition” of opposition political parties, trade unions, think tanks, and climate change activists that is apparently holding back economic growth in the world’s sixth largest national economy.
Economic growth is generally perceived to be beneficial. As per capita incomes increase in a growing economy, the quality of life continues to improve-the result of better material standards of living, growing purchasing power, and higher consumer spending, while the population overall benefits from access to better health, education, and recreation facilities. But such growth can come at a cost, from so-called externalities caused by environmental degradation and pollution, and only a small proportion of the population may eventually benefit from per capita real income growth in an era of growing inequality in incomes and wealth. It has also been recognised for some time that technological innovation may bring about creative destruction, with the replacement of existing industries and firms with newer ones, to the dissatisfaction of modern-day Luddites.
Economic growth is commonly measured as GDP (gross domestic product), which includes all final goods and services produced within the nation, and corrected for inflation, for both domestic and overseas consumers. The GDP is reported in three formats: Gross Domestic Expenditure (expenditure on all final goods and services produced in an economy by households, businesses, and corporations), Gross Domestic Output (value of all final goods and services provided, less the value of all inputs used in their production), and Gross Domestic Income (wages and profits earned from production of goods and services), and reported in the UK National Accounts (Blue Book), produced by the Office for National Statistics.
The British economy has become somewhat sluggish in recent years. Brexit has increased the costs of trade in goods and services with the EU, while the COVID-19 pandemic severely restricted economic activity during lockdowns, contracting the economy. Most recently, rising wholesale energy prices-an inflationary effect of the Ukraine conflict-have inflicted a further economic shock, thereby hindering the recovery of an economy already grappling with high inflation and a cost-of-living crisis. GDP growth in the UK is thus likely to be stifled by falling real disposable incomes and consumer spending, as household budgets are constrained by high prices for food, fuel and energy and by rising mortgage costs.
Productivity, which can be measured by either output per worker, output per hour worked, or by efficiency of labour and capital used, is a particular concern, having flat-lined since 2008, and also lagged behind that in Western Europe (France, Germany), the US, and Japan. Since the 2008 global financial crisis, the UK has indeed become a low-growth, low productivity, and low-wage economy.
Demand can be considered as the driving force and supply the sustaining force for economic growth. The Conservative Party’s emphasis on supply-side policies, rather than Keynesian demand-side economics, thus puts the burden on changes in supply of labour and capital and in the efficiency with which these productive inputs are used to produce desired outputs (total factor productivity).
The British economy produces manufactured goods, intellectual property, and services. Productivity is generally higher in high value-added manufacturing jobs, as compared with low value-added service jobs. The number of people employed in the manufacturing sector has fallen steadily, with the shift of labour-intensive manufacturing to low-wage economies in East and South Asia and with the streamlining of manufacturing processes by automation and artificial intelligence, including robotics. The contribution of manufacturing to GDP has accordingly dropped relative to that of the services sector, just as the focus of manufacturers has shifted to high-value-added high-tech industries. Manufacturing output began to stagnate in the 1970s, from weak management, a break-down in industrial relations, lack of investment and innovation, and poor after-sales support. Currently, the UK has demonstrable strengths in the aerospace, pharmaceuticals, and beverages industries, while the services sector dominates the economy, in the form of financial services, business services (legal and consulting), and cultural and recreational services, including education, leisure and hospitality. Exports of manufactured goods have, however, been adversely impacted by loss of access to EU markets following Brexit and by supply chain bottlenecks, leading to a current account deficit of 8.3 per cent of GDP in Q1 of 2022.
Economic growth requires human capital (workforce), access to finance, investment in physical capital (infrastructure), and innovation (research and development). Britain’s workforce is unfortunately subject to a skills gap, reflected in variable standards of literacy and numeracy, and deficiencies in IT skills and STEM (science, technology, engineering, and mathematics) education, increasing the nation’s reliance on visiting workers to make up the shortfall.
A levelling-up agenda that encourages infrastructure investment in the North of England and other “left-behind” regions, in the form of town centre regeneration, social infrastructure, the foundational economy, transport and digital connectivity, workforce development, and creation of industrial hubs, seems welcome. A word of caution is necessary, as recent major infrastructure projects such as Cross Rail, Elizabeth Line, and HS2 have been plagued by delays and overspends.
The Conservative solution for the economy is ideologically driven, favouring a small state, limited regulation, cuts in public spending, benefits and public sector pensions reform, and a smaller number of quangos. Their liberalisation agenda includes freeports, tariff-free zones outside of UK customs territory that enable temporary imports of goods without excise duties, and enterprise zones of increased creativity and production, freed from planning restrictions and other regulations that are the bane of blue-blooded Conservatives. A lukewarm approach towards the Net Zero transition may, at the same time slow down the planned process of greening of the economy, itself a driver of economic growth.
Economic growth may be a desirable aspiration, but the planned interventions will likely take several years to make an impact, there being much catching-up to do. Unfunded tax cuts, despite increased borrowing and the costs of barrowing, and a growing fiscal deficit, have weakened the pound, induced turbulence in the UK gilt markets, and invited adverse comments from the IMF, unusual for an advanced economy. The Prime Minister has, at best, two years, in the first instance, to kick-start the process and it seems by no means certain that her planned interventions in the economy will be rewarded with early success.
Ashis Banerjee