Labour must address Britain’s deep social dysfunction to address its economic dysfunction
The British economy is a conundrum. We have seen millions come to our shores in search, we are told, of work. Yet there are dire labour shortages across many important sectors, from hospitality to healthcare. At the same time, more and more of the population are becoming economically inactive, with a record 6.4 million on out of work benefits. If all this has you scratching your head, consider this: wages remain stagnant, failing to rise despite greater demand. It isn’t the only part of the market where the laws of supply and demand aren’t working. Despite increasing housing demand, especially in London and the South East, housebuilding is lagging behind. As this is going on, house prices have gone up well ahead of the gap between supply and demand, buoyed by speculative finance.
For these complex and contradictory problems, there are many simplistic solutions traded about, from those who say we must deregulate markets, to those who propose we simply ramp up public spending. But the problem clearly goes deeper than the policy architecture of successive governments — we are looking at a forty year structural failure of the British system at every level.
There are parts of the British economy that work very well, and disproportionately benefit a minority. Our universities still churn out bright graduates and innovative ideas that are swiftly snapped up by overseas investors. From football teams to SW1 real estate, British assets are intensely desirable, and we are an attractive destination for high net worth individuals looking to park cash, buy a second home, engage in luxury consumption, or find an elite private school place for their children. Our financial, IT, pharmaceutical and high end service sectors are extremely successful, and the economy is heavily dependent on their wellbeing. But by narrowly focusing on these strengths, they are fast becoming vulnerabilities.
All this has led to an economy dangerously dependent on foreign capital and manufacturing
New inventions and enterprises, often the products of intense state investment in research and education, as well as a potent institutional inheritance, are rarely taken to scale. Despite our leading role in the development of the internet, Britain has never produced a tech industry on the American level. The fate of DeepMind, a British AI firm sold off to Google, was a typical outcome — at the point any UK firm becomes sufficiently successful, it becomes attractive enough to be taken over by a foreign firm. It’s a pattern seen time and time again, from the acquisition of Pilkington, the world’s second largest manufacturer of glass, by a Japanese company, to the sale of Boots to a US pharmaceutical giant. Foreign investment isn’t always a bad thing, but there seem to be no limits or guardrails, whether that means missing out on Britain being at the forefront of AI, or letting Harland and Wolfe be snapped up by a Spanish state-owned shipbuilder still in the process of building Royal Navy warships. This is to say nothing of economic influence from non-allied powers, like China’s Huawei, which was only narrowly blocked from running UK mobile networks, but has been allowed to invest in critical energy infrastructure.
All this has led to an economy dangerously dependent on foreign capital and manufacturing, and looking to the service sector to pay the tax bills. The problem with this approach, apart from its vulnerability to global forces, is that as well as relying on the strengths of the service sector, we are uniquely exposed to its weaknesses. The elite service economy is at once poor at driving growth outside of certain concentrated economic hubs, and at employing non-graduates. Beyond a certain extremely successful and productive quadrant, much of the service economy is really a “servant sector” of delivery drivers, shop assistants, low level sales and advertising jobs, and digital manual labour. These roles are often unproductive, poorly paid and insecure. Combined with a relatively generous welfare state, subsidised by the elite section of the service sector, this creates a considerable disincentive for those not in employment to take up these jobs, especially if they have some more or less credible claim of mental or physical sickness. Because the work is generally unproductive, and in sectors with low profit margins, wages only go up under the strongest of pressures. This pressure has yet to come about because of the release valve of mass migration, which imports workers for whom the economic differentials of even poorly paid work pay off.
This downward spiral can only be arrested by a massive, structural rethink of welfare, migration and industrial policy
Mass migration seems like a solution, but it is really a Ponzi scheme. Much of it is effectively state subsidised, when lifetime contributions and expenses are taken into account, and it places yet further demands on our dysfunctional housing market, which in turn further prices out British workers from the most economically active parts of the country.
This downward spiral can only be arrested by a massive, structural rethink of welfare, migration and industrial policy. Manufacturing, which drives more innovation, productivity gains and wage growth than the service sector, is one vital missing ingredient. Since the 1990s it has gone from 17 per cent of the economy to less than 10 per cent by 2018. Crucially, it lets us realise the economic value of our scientific innovation, whilst distributing those gains amongst industrial workers.
A revival in manufacturing will require considerable state intervention and support, but it must also go hand in hand with setting the conditions for more Britons to enter the workforce, and to ensure that work pays. At present our welfare system has entirely lost its reciprocal element, and in multiple areas, from social housing, to benefits, to tax and education, British workers are punished for entering employment, starting a family, getting married or increasing their income. Worklessness, dishonesty and single parent families are incentivised in this system. Those who contribute the most get the least, whilst those who can demonstrate the most dysfunction get priority access to resources. Not only is this morally corrosive, but unfunded liabilities like state and public pensions are fast becoming a lethal balance of payments problem.
Restoring the link between tax contributions and public benefits is a vital step to getting people back to work, and driving social mobility rather than perpetuating a dysfunctional underclass. But even this is not enough. Faith in the system is corroded by the continual influx of people from outside of it, and this cheap foreign labour in turn suppresses the wage growth that could push more people into employment and incentivise more investment to go into higher productivity and higher wage industries like manufacturing.
But if we can get some of these factors under control, the downward spiral could become a virtuous circle. A more regulated, skilled and better paid workforce would be less porous to cheap labour from abroad, and more likely to attract workers from comparable economies. A more balanced economy would see more jobs created in deprived areas where land is cheap and labour abundant. Along with lower migration, and higher wages, this would break the housing bottleneck on both the supply and demand side, and a more industrial economy would also have a larger construction sector.
Is there any hope of this on the horizon? The Labour government has already acknowledged that it must act on welfare reform and migration. Yet it has stalled on industrial policy, constrained by Reeve’s fiscal rules, and obsessed with high profile foreign trade deals. Of the political parties, only Reform shows any sign of the iron focus on the national interest needed to create change, but it remains incoherent, and caught between populist promises and lingering Thatcherism. There are some reasons for optimism, but it will take all three factors — reindustrialisation, welfare reform, and border control, to bring Britain’s missing millions back into employment, and revive our broken economy.
