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25 November 2022

What’s wrong with the British economy?

Our leaders have had no strategy and no vision of the country’s place in a deglobalising, post-Brexit landscape.

By Paul Mason

Like many who were against Boris Johnson’s Brexit, I’ve watched recent cabinet briefings about a potential “Swiss-style relationship” with the EU with incredulity. It is galling to see reality bite those people who have long proclaimed their immunity to it.

Since the Brexit referendum, Sterling has lost a third of its value. Since the transition period ended in December 2021, the intensity of Britain’s trade has fallen, while in the rest of the G7 it has surged. As for business investment, the driver of Britain’s meagre recovery after the 2008 crash, it has not recovered from Covid and, according to the Office for Budget Responsibility, will not reach its 2019 levels until mid-2025.

Clearly some form of comprehensive trade realignment, combined with urgent agreements on energy and national security, is needed. But those who believe everything would be resolved if we simply unblocked trade to Europe, with some form of Swiss-style deal or customs union, are mistaken. There is something more wrong with the UK economy than Brexit, namely the absence of a post-Brexit national business model, the failure of the political class to imagine an economic alternative and – above all – a skills crisis that hampers all attempts to recover.

The incoherence of the economic model the Tories are pursuing is the fault of the right-wing alliance that championed Brexit. In the minds of the European Research Group, Brexit would open the route to a small-state, low-tax and lightly regulated economy that could out-compete the developed world by driving down labour costs.

Johnson complicated the matter by promising the opposite: a high-skill, high-wage, high-productivity economy. His vision for how to get there was outlined in the infamous Greenwich speech in February 2020 where, pointing to the 18th-century paintings on the ceiling of the Royal Naval College, he promised to emulate the mercantile capitalists who built the British Empire. “We have the opportunity, we have the newly recaptured powers, we know where we want to go, and that is out into the world,” he said. “We are re-emerging after decades of hibernation as a campaigner for global free trade.”

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Leaving aside the historical revisionism about the British Empire, the project was doomed. Even before Covid the world economy was deglobalising. The pandemic accelerated the break-up of the world economy into mutually antagonistic trading blocs, with all major producers scrambling to secure supplies first of PPE, then semiconductors, then basic raw materials and finally – once Russia invaded Ukraine – food and natural gas.

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The UK’s problem is that its economy is configured for the old world of financial globalisation, which no longer exists. It is defined by a set of service-centred, white-collar oriented city economies, with low-value service sectors and de-industrialised towns. So it was uniquely disadvantaged when, in the aftermath of Covid, there was a global surge in demand for computers, electronics, chemicals, electrical equipment and primary metals. But as the audit and financial management firm Deloitte pointed out in April, even in areas where UK exports are traditionally strong, such as chemicals, there has been no post-Covid surge.

To understand the deeper malaise, we must ask why Johnson abolished Theresa May’s industrial strategy, and with it the nascent industrial strategy council headed by the former Bank of England economist Andy Haldane. It was replaced by “levelling up”, which amounted to multi-million pots of money thrown haphazardly at Red Wall towns and places that influential Tory MPs, such as Rishi Sunak, happen to represent.

From March 2021 there was, effectively, no economic strategy – only the political strategy of dispensing money at random. Nor was there an effective skills strategy. In retrospect the Johnson administration was a fragile alliance of ultra-free-marketeers and dirigistes, the latter unwilling or unable to create any of the micro-institutions needed to produce high-tech or high-productivity outcomes.

You can see the results everywhere: the acute shortage of doctors, nurses and care workers; in manufacturing 43 per cent of jobs needing Stem skills are classified as hard to fill, because there are not enough graduates, and not enough entry-level jobs for those who have graduated. Meanwhile, at the low-paid end of the workforce, the end of free movement, combined with the fall of sterling and the rise of real living standards in Eastern Europe, means employers can no longer rely on migration.

Labour has identified the problem but keeps on stumbling into the ideological traps erected by the retreating Brexiteers. When Keir Starmer says the NHS, and the economy in general, is too reliant on migrant workers he is correct, but he is greeted by a chorus of boos from his own side for devaluing migrants. Likewise, when he calls for a high-skill economy he faces criticism for “devaluing low-paid work”.

To cut through these narrative minefields he has to espouse a vision of the future. Britain can be a high-skilled, high-wage, high-productivity economy only if it invests. Since business investment is stagnant the state will have to lead, which means borrowing to invest in green technologies. Meanwhile, as a matter of social justice, it will be a country that values and rewards lower-skilled work because this, too, is essential.

Such a vision only becomes self-sustaining if we have stable and predictable trading relationships with Europe and let our relationship with Europe govern our trade relationship with the other major blocs. This, in turn, mandates some form of customs agreement.

Meanwhile you have to embrace migration, but in a way that commands social acceptance, which means both advocating it and enforcing labour market reforms and increased service levels so that the “cheap labour” and “swamped doctors surgery” rhetoric of the right is stifled.

Finally, as the Institute for Public Policy Research recommended in 2018, we need the “smart reindustrialisation” of the economy. The UK lags behind its key competitors on space, robotics and manufacturing research and development – and even in new, chosen specialisms such as electric vehicles and car-battery manufacture an exodus is threatened.

As for skills, there is an urgent need to prime the pumps – both through migration, a rapid overhaul of apprenticeship and degree programmes, and in the Stem pathways of the school system. In 2019 the number of students graduating in engineering and technology, computer science, physical science and maths was 127,000 – just 16 per cent of the total and massively outnumbered by the legions of business studies graduates.

None of this happens without vision. Then you face the more difficult questions, such as who will train the doctors and the engineers, and what incentives will make them move to the A&E wards of Pembrokeshire or the skills-hungry aerospace plants of Lancashire?

That’s the ultimate demand all ministers, and shadow ministers, deserve to face: show us the schedule, the deadlines, the milestones – and before you do that, simply demonstrate a basic understanding that “the market” is not going to solve this predicament.

[See also: Keeping quiet on Brexit is a shrewd move for Labour now, but a strategic disaster in the long term]

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