We have argued that the task facing Britain in the 2020s is to renew our economic strategy to tackle the twin challenges of low growth and high inequality, and to do so in a period of more significant change than we have been used to. It is far from certain that our politics will rise to this task: it is not an easy undertaking, and it remains unclear whether we are serious as a nation about confronting it.
This chapter turns to what the key building blocks of a more serious attempt might look like: one that is grounded in the evidence about the kind of economy the UK is and could plausibly be. It aims to be serious not just about the constraints and trade offs involved but also the scale of ambition required to make a substantial difference. Its argument is that there is a plausible landing zone for the kind of strategy that is needed, which offers the prospect not just of overcoming our problems but of building on our strengths to set the UK on a path to being a fairer, more prosperous, and greener country.
Intentionally our focus is on the most material elements of a renewed UK-wide strategy, rather than a comprehensive list of every policy area. The second phase of The Economy 2030 Inquiry over the coming year will develop specific policy interventions that would be required to make the implementation of such a strategy a success.
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- The UK is the second-largest services exporter in the world and a broad-based services economy, built on successful musicians and architects as well as bankers. This is not the cause of our slow growth: services-led economies are on average higher-income than goods specialists.
- This will not change anytime soon: of the top 10 products the UK was most specialised in back in 1989, seven were in our top 10 in 2019.
- The task for Britain is to make a success of our services economy, including by wrestling with the upward pressure it places on inequality: jobs in tradable services are 80 per cent more likely than average to pay in the top 5 per cent while services exports are concentrated in the highest wage areas.
While our current economic specialisation is consistent with future prosperity, our regional divides are not. The UK’s most plausible route to raising national income and closing regional gaps is our big cities outside London succeeding: all of England’s biggest cities outside London currently have productivity levels below the national average.
- But achieving this requires change on a scale not currently contemplated: halving Manchester’s productivity gap to London, so that it becomes as productive as Edinburgh, would require tens of billions of pounds of investment and an increase in size of over 500,000 workers.
The 2020s has to be a high-investment decade not just because of net zero, but because the UK has been a low-investment economy for too long. In the 40 years to 2019, total fixed investment in the UK averaged 19 per cent of GDP, the lowest in the G7.
- We need an economy better able to manage change. In the UK, 40 per cent of employed people experience a large loss of income when becoming non-employed, compared to 30 per cent of employed people in Germany and 26 per cent of employed people in France. This lack of income insurance not only provides too little support to those losing a job, but prevents risk taking.
- Good jobs must be an explicit objective of an economic strategy. We should celebrate the benefits of our flexible labour market, including low unemployment, but not be scared of tackling its flaws. Half of shift workers in Britain receive less than a week’s notice of their working hours or schedules, and under 10 per cent of low-paid private sector workers are unionised.
- We should combine realism about the different roles of different places in our economy with an ambition to reject wide gaps in status and quality of life across the country. Delivering on that ambition is hard when council revenues per person fell by 30 per cent between 2009 and 2019 in the most-deprived places, compared to 15 per cent in the least-deprived places. The proportion of people thinking their local area has deteriorated in the preceding two years has risen steadily from 20 per cent in 2013-14 to 26 per cent in 2019-20.
- The British state has grown which, combined with slow growth, has seen taxes raised to their highest levels since the 1940s. But these higher taxes will need to be fair and efficient. Both main parties’ focus on raising National Insurance has asked more of younger workers at a time of flatlining wages, but nothing of landlords or most pensioners. A strategy for the 2020s will need to consider new approaches, recognising that wealth has risen from three to almost eight times national income since the 1980s, while wealth taxes have not risen at all as a share of GDP.