The UK, in common with all rich nations and some poorer ones too, faces an ageing population. The health and social care needed to support this needs to be well-funded, which requires sufficient wealth creation across the country.
At the moment, the UK’s productivity lags significantly behind other rich countries and needs to be seriously addressed by whichever government takes office after the upcoming election. The growth of productivity, or how much output is produced from given inputs (land, labour, capital, entrepreneurship etc), is the key to a rising standard of living. It makes possible choices between, for example, more work for a higher income, or more leisure for the same income.
The Guardian’s economics editor Larry Elliott here discusses these issues and makes a strong case for an ambitious industrial and regional policy to boost productivity growth. As he says, the average productivity in the UK’s Greater South-East, including London, is higher than that in Germany. If the average productivity of the UK as a whole is well behind that in Germany, as well as France and the US, this means that there is a strong regional dimension to the problem. The rest of the UK lags well behind the Greater South-East, and this is a major reason for the country’s high level of regional income inequality.
This is not a new development. Under Margaret Thatcher, the deep recession of the 1980s and the periodic overvaluation of the pound over decades has constrained the growth of exports, particularly of manufactures. This affected the North of England especially badly, as shrunken industries were often never replaced by new and growing ones. Outside the South-East, unemployment is generally higher and incomes and productivity are lower. The boom of the mid-to-late 1980s was concentrated in services and in the South-East, further exacerbating the regional divide.
Under the last Labour government, substantial public money was poured into poorer regions and public sector employment rose substantially. However since the turn to austerity under the Conservatives, public employment has fallen back dramatically. While private sector employment has boomed, much of this has been at low wages or in involuntary self-employment. Prosperity is absent from many parts of the UK, which surely contributed to the vote for Brexit.
What is needed is a private sector boom outside the South-East, which allows the neglected regions of the UK to catch up with the richer ones. Some might argue that encouraging migration to the South, where greater demand for more highly paid employment already exists is part of the solution. Maybe so, but an expansion in the Midlands and North is also vital. What is to be done?
Sustaining the weaker value of the pound, although it may make imports more expensive and reduce consumption for a time, should help boost exports. There are signs of this happening, although there has been no renaissance. But it could eventually lead to a long-overdue rebalancing of the economy, encouraging the growth of net exports and reducing the accumulation of debt in the private and public sectors.
An ambitious regional policy would involve substantial public investment in infrastructure and fiscal incentives to encourage private sector investment and growth outside the South-East.
An industrial policy which encourages innovation, R&D and ongoing skill development is also vital. Improved skills on their own will not work. There needs to be a demand for skills and good quality jobs, generated by private sector growth which absorbs the available supply. In the absence of such demand, workers with improved skills will simply move South to where the jobs are.
None of this can be left up to the private sector alone, or indeed the public sector. It should instead involve public-private sector cooperation from the national to the local level. An attitude of experimentation is needed, so that successful policy outcomes are reinforced and failures are learned from but discarded. A diverse economic base should be developed as far as possible, in order to promote knowledge and investment spillovers between firms and sectors, and to reduce the impact of economic shocks over the longer term.
Some of these ideas can be found in the election manifestos of the main political parties in the UK, which is welcome. To make a success of life after Brexit, to generate the resources needed to support an ageing population, to make inroads into inequality and to close the productivity gap, there is plenty of work ahead for policymakers.