- This article comes in response to the launch of Labour’s business manifesto – A Better Plan For Business – on Monday 30th March.
Ed Miliband’s speech on Monday to launch Labour’s “Business manifesto” is an important step in strengthening Labour’s economic programme. Inevitably, the pressure of the General Election campaign circumscribed the thinking behind the speech. But in just a few short weeks Labour could be in government, and acting upon its programme. There is no reason to delay our engagement with the issues, even if critically.
The great strength of the speech is in the explanation of the impact of the Tories EU policy upon the country’s economic prospects. Ed rightly lambastes the Tories proposal to waste two years in a referendum campaign, which threatens to “shut UK businesses out of the market that gives them access to the world’s largest trading bloc”.
Should the Tories be returned to government, Cameron would oversee a period when British and foreign companies would not make substantial investment decisions about the British economy. The internal conflicts of the Tories would override the economic development of the country.
This line of divide with the Tories is crucial for Labour’s prospects. We must make no concessions to the anti-EU position of the Tories, or their racist co-thinkers in UKIP.
Much of the speech outlines specific policies which are positive-such as high quality apprenticeships, a British Investment Bank, an independent national infrastructure commission, etc. In different proportions, such policies can contribute to raising living standards and expanding the economy.
However, the speech is less convincing when identifying the central economic problems. We learn that: “our productivity gap is at its highest level for nearly a quarter of a century. This is our biggest economic challenge, as we lose our competitive edge in a world that can’t wait”.
Is the difference in productivity with other G7 countries really our biggest economic challenge? From June 1997 to 2010 the average real GDP growth rate in the UK was 2.1%. Under the Coalition’s austerity policy, the average real growth rate for the years 2010 to 2021 1.65%. So much then for the Tories claim of economic success.
Yet the preceding years show that low growth dogs the economy. This is not a simple problem of productivity. It is primarily a problem of lack of investment.
We’re still in the slowest recovery on record. GDP is higher at the end of 2021 than it was at the beginning of 2008, when the recession began. Yet even now, new investment is still £10 billion below its previous peak at the end of 2007. It fell again in the final quarter of 2021. The productivity crisis exists because there is no recovery in investment. Until there is, there will be no robust or sustainable recovery.
The fast-growing Asian economies are characterised by much higher levels of investment. Osborne’s assumptions that shrinking the state will lead to “a march of the manufacturers” and a large raft of private investment, has proven to be false. Experience shows that the state makes a vital contribution in promoting investment.
Alongside this, sustained GDP growth comes from additional capital and labour inputs rather than other factors in productivity. This was borne out by a study of the comparative sources of growth for the period 1990 to 2010. In the developed economies, including Britain, in GDP growth, capital inputs made up 56.9 %, labour inputs made up 32.4% and total factor productivity made up just 10.7%1.
Once considered, it does not come as a surprise that economic growth first depends upon additional capital investment, secondly upon additional investment in labour, and only finally upon more effective use of productive resources.
A collapse in investment, primarily private investment, led to the recession. Private investors are still reluctant to invest. So hence the faltering recovery.
Ed Miliband rightly said that: “there is no future for Britain as a how-low-can-you-go-economy”. The preferred option of many employers is to squeeze the workforce like a lemon. This requires no new investment, but is only productive in a short sighted way. Lemonade is best made with modern machines and a well trained, well paid workforce.
Investment is just not desirable, it is absolutely essential. Investment in our infrastructure, housing, and renewing our public services are preconditions to sustained economic growth. Investment in jobs to bring these projects to life will raise living standards again. The increased tax revenues from such productive investment, and the associated reduction in welfare payments, will close the deficit.
In power, Labour will have to address the issues of stagnation, lower living standards, and the real results of austerity. Ed Miliband’s speech shows that our economic alternative to the Tories is still a work in progress.
1 “The Dynamics of Economic Growth”, Vu Minh Khuong (Edward Elgar) p.181