Since the onset of the financial crisis, the Conservatives have hammered home a now-familiar narrative: Labour crashed the car, overspending and failing to rein in the banks. Austerity, we were told, was the only answer. Ten years on our economy is beset by barely-visible growth, undoubtedly exacerbated by limited investment. For many in this country, the stark reality has been a fall in living standards.
Between 2007 and 2016, the British economy grew on average by just 1.1 per cent per annum. Without a radical shift in our economic policy – and setting aside Brexit – few people think that the economy is going to grow any more rapidly during the next ten years than it has between 2010 and 2016, when the average was 1.9 per cent. Factor in our productivity crisis, and 1.5 per cent looks more probable.
This presents the whole country, but particularly Labour, with a huge problem. With a growth rate of, say, 1.5 per cent a year and the population increasing by around 0.7 per cent each year, only 0.8 per cent is left. This then largely disappears as a result of three factors: the need to finance our balance of payments; the share of wages as a proportion of GDP steadily falling; and the majority of wage increases being enjoyed by the better off. This is why – unfortunately – most people are not going to see their wages rise at all for the foreseeable future.
What about redistribution? There are three main axes of inequality in Britain at present. As Rebecca Long-Bailey told September’s party conference, we now have the most regionally imbalanced economy in Europe. Forty per cent of our economic output comes from London and the south east. There are huge inequalities between the old and the young. And there are very wide differences in wealth, income and life chances between the rich and the poor. With almost no growth, can any of these gaps be closed? Sadly not. If anything, it is likely that the gulf will widen.
Regional inequality is driven by the fact that London has services to sell to the rest of the world which enables it to pay its way, whereas – mainly because of de-industrialisation – most of the rest of the country does not. Manufacturing as a percentage of GDP has fallen from almost 30 per cent as late as 1980, to less than 10 per cent now – and it is still drifting down. Between 2007 and 2017, average incomes in London more or less kept up with inflation. In Wales, they fell by 10 per cent. If we carry on as we are, expect these sorts of gaps to continue to widen.
The main reason why younger people are doing so much worse than those who are older, compared with the situation 20 years ago, is that both housing availability and job prospects are much less favourable than in the 1990s. Without more economic growth, we will not be able to afford to build more housing and without productivity growth we will not create better jobs. Both are intimately connected to economic growth.
Delivering equality of wealth, income and life chances depends on us having a sufficiently robust and successful economic policy to enable us to face down the vested interests of the rich. With growth at only around 1.5 per cent are we really going to be in a position to do it?
The shadow chancellor, John McDonnell, has proposed a “real living wage” of £10 per hour. This would not solve the problem in itself. The reality is that neither real wage increases nor a fairer society are possible without economic growth running at three per cent or four per cent on a sustainable basis. Is this possible? Yes, but not without a radical change in policies.
The reason why investment is so low is that nearly all manufacturing is unprofitable in Britain, which is why we have de-industrialised to the extent we have. This has happened because the exchange rate has been – and still is – too high. Investment in what really produces economic growth – mechanisation, technology and power – is therefore pitifully low. Without the resources created by the return on private sector investment, social investment in roads, schools, hospitals rail and housing cannot be afforded.
Because we have de-industrialised to such an extent, we do not have enough to sell to the rest of the world, to pay for our imports, so we have a huge visible trade deficit. Because we also have a large negative net income from abroad and heavy transfer payments overseas every year, we have an even bigger balance of payments problem, sucking demand out of the economy, generating government borrowing and fostering austerity programmes. Because these deficits have to be financed by borrowing and selling assets, we get deeper and deeper into debt. What little unsustainable growth we then have is driven by ultra-low interest rates, equity realisation and consumer demand instead of by net trade and investment.
The result is such an unbalanced economy that there is no growth. The root cause is our over-valued exchange rate which triggers off all the other imbalances. Until we realise this, expect no redistribution. But if there is neither growth nor redistribution, what is Labour for?
John Mills is the founder of consumer goods giant JML and has been a Labour Party activist for several decades. He has also been a major party donor and chairs the pro-Brexit organisation Labour Leave, as well as Labour Future.