The UK election is a competition in irresponsibility. The Conservatives promise to take the UK out of the world's deepest free trade area, though nobody knows quite how and when. Labour is even more obscure on Brexit and outbids the Tories in making expensive, radical and incredible promises, across the board.
Yet the economic realities will not respond to the charms of Boris Johnson or Jeremy Corbyn, as voters may. What are those realities? Four need particular attention: productivity; employment; investment; and the external balance. These realities are linked and impose tight constraints on the true, as opposed to fanciful, choices the UK now faces.
As the Institute for Fiscal Studies notes, “over the last 11 years, productivity – as measured by output per hour worked – has grown by just 2.9 per cent. That is about as much as it grew on average every 15 months in the preceding 40 years”.
As a consequence of this dire productivity performance, average real wages were no higher in April 2019 than they had been 11 years earlier. To put this in context, a study from the Resolution Trust states that "the past decade has been the worst for earnings growth since the Napoleonic Wars". Ouch!
Employment, in contrast, looks rather good. The proportion of the population aged between 15 and 64 in employment jumped from 73 per cent in 2008 to 75 per cent in 2018. For men, the increase was only from 79 to 80 per cent. But, for women, it was from 67 to 71 per cent.
Japan and Germany did even better than the UK in raising female employment. Yet the UK's was still a striking increase. US female employment, in stark contrast, was five percentage points below UK levels in 2018 and barely changed after 2008.
The Resolution Trust notes that the biggest employment increases among women “have occurred in households with children and among those on lower incomes”. Behind this seems to have been an increase in female labour supply, in response to lower and more uncertain earnings of male partners and cuts in benefits.
The fact that increases in work coincided with lower real wages supports the idea that this was a story of supply push, not demand pull, albeit in a flexible labour market. So the rise in employment looks more like a response to bad performance than a success. Behind it lies the collapse in the growth of productivity and real earnings. What drove the former?
The rise in employment is too small to explain more than a small proportion of the huge collapse in productivity growth. The weakness of investment must be a more important cause. Technical progress is not disembodied. Much of it is embodied in fixed investment.
Alas, UK gross fixed investment averaged only just over 16 per cent of gross domestic product between 2008 and 2017. The only moderately advanced economy with a still lower ratio was crisis-hit Greece. German and US fixed investment was close to 20 per cent of GDP.
While UK public investment was low, by international standards, at 2.8 per cent of GDP, it was still ahead of Italy’s and Germany’s. But fixed investment in the UK’s private sector was smaller, relative to GDP, than that of all other advanced countries, bar Greece.
Without a jump in private investment, it is hard to imagine a large improvement in productivity growth. Yet the deep uncertainty created by Brexit as well as the tax and other policies proposed by Labour make such a jump seem highly unlikely. A rise in public investment is imaginable. But experience with Crossrail and the High Speed 2 rail line shows just how difficult it is to design and implement big infrastructure projects in reasonable time.
Yet raising investment is not the only obstacle. Resource constraints can also matter.
The most relevant one is the payments deficit. Without a policy to raise savings in the economy, a big surge in investment will surely increase an already very large current account deficit. It was close to 4 per cent of GDP in 2018, the largest in the G7 economies. A surge in investment spending to US levels could, all other things being equal, raise this deficit to more than 7 cent of GDP.
In a savings-glut world, this might be financed on reasonable terms, for a while. But a necessary condition would be the confidence of the world’s savers and investors in the good sense, self-discipline and realism of British policymakers.
I hope those people feel just that, as they look at British politics today. But it can hardly be likely. A collapse in the currency, big jump in the price level and a further compression of real wages seem far more plausible.
The UK is an island. But a wide world of investors watches and wonders. – Copyright The Financial Times Limited 2019
