Britain’s productivity problem: Planet Money: NPR

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Britain’s Prime Minister Liz Truss will resign in a speech at 10 Downing Street in central London on October 20, 2022.

DANIEL LEAL/AFP via Getty Images


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DANIEL LEAL/AFP via Getty Images


Britain’s Prime Minister Liz Truss will resign in a speech at 10 Downing Street in central London on October 20, 2022.

DANIEL LEAL/AFP via Getty Images

British Prime Minister Liz Truss resigned on Thursday after just 44 days. To some she was an economic naïve thrown down by the delusions of resurgent Thatcherism; to others she was a conservative clown who had turned the UK into a laughing stock. The turmoil in the UK economy caused by her budget prompted European newspapers to mock Britain for leaving the European Union. American media wondered if she could hold out until the end of the month. Britain’s own newspapers compared the Prime Minister to one rotten head of lettuce – and then noted the lettuce survived them. Italy’s leading daily newspaper, Corriere della Sera, ran with the headline “Panic in London: ‘We’ve become the new Italy’.”

This latest blow was particularly galling for Truss, and not just because he nodded at how politically unstable the UK has become (Italy went through six prime ministers in the decade between 2006 and 2016: if Truss’s successor is appointed, there will be it will be four in four years for the UK). The comparison also points to Britain’s economic malaise: its slow growth, its bloated public services – and its sluggish productivity, a long-lived feature of the UK economy that Truss promised to reverse.

Note the productivity gap

Truss and her hapless finance minister, Kwasi Kwarteng, were two of the five co-authors of Britannia unleasheda pamphlet published in 2012 warning that Britain is mired in a quagmire of low productivity, a lack of ambition and an inability to compete with fast-growing Asian economies.

“The Brits are among the world’s worst slackers,” they wrote. “We work the lowest hours, we retire early and our productivity is poor. While Indian children want to be doctors or businessmen, the British are more interested in football and pop music.”

Truss telegraphed her intent to address Britain’s culture of unproductive laziness during the race to succeed Boris Johnson, so it came as no surprise to anyone listening when she stormed out the gate, taking up arms at Britain’s low productivity and sluggish growth directed. she mini budgetreleased September 23, promised the biggest tax cuts the UK had seen since 1972 and an energy price freeze, all to be paid for with a massive credit spree.

It all went as her competitor Rishi Sunak had predicted: markets freaked out, the pound fell to an all-time low, bond yields soared higher and the Bank of England had to step in with an emergency bailout to protect funds under management the wealth of British pensioners. Within a month, both Truss and Kwarteng were gone.

The productivity problem

Productivity is important to an economy: it’s how you do more with less, and it’s vital to improving a nation’s standard of living. Britain was a highly productive country in the 18th century – if not the most productive – thanks to the Industrial Revolution and colonialism. However, as the 20th century began, Britain lost its place to the US and – thanks in part to two world wars – never regained it.

Productivity dwindled for years. Margaret Thatcher made improvement one of her missions, urging people to “go abroad and see how much better off our neighbors are” while she was in opposition. While in power in 1979, she initiated a series of reforms that cut taxes, prioritized employers over unions, dismantled public ownership of assets, and deregulated much of the economy.

And productivity has improved compared to other European nations. The downside was that union hollowing and manufacturing depressed wages, stifled innovation and left Britain overly dependent on the financial and service sectors. This kept productivity and growth in check throughout the millennium. Still, productivity increased in the early 2000s at a rate second only to the United States. When the financial crisis hit in 2008, however, productivity hit a wall. Diane Coyle, a professor of public policy at the University of Cambridge, says it never really recovered.

“We’ve had stagnant productivity since the mid-2000s,” she says. “And while they’ve had slowdowns relative to other countries, we’ve just had a much worse slowdown than everyone else.”

Between 2009 and 2019, Britain’s productivity growth rate was the second slowest in the G7, just ahead of Italy. Coyle says there are many factors behind the UK’s weak productivity growth; In fact, there are so many that she likens finding a culprit to completing an Agatha Christie mystery: turns out everyone did it.

“It’s a system issue,” says Coyle. “And I can give you a list of things that went wrong: low investment, very centralized government decisions, really inadequate skills, education, constant hacking and policy changing; an economy that is far too focused on financial services and professional services at the expense of manufacturing.”

Blame for Brexit

A suspicion that many point the finger at: Brexit. Soumaya Keynes, Editor at The economistsays Britain’s exit from the EU has undoubtedly had an impact on productivity.

“It created all kinds of uncertainty and stability, and made it harder for companies to plan the kinds of productive investments that would be good for the economy,” says Keynes.

This uncertainty may have depressed business investment by up to 11 percent in 2019. A study by the Bank of England estimates that the Brexit process has reduced the productivity of British companies between 2% and 5%since the 2016 exit vote. performance per hour worked in the UK is around 15% below that in the United States, Germany and France.

However, the effects of Brexit on the British economy are likely to be short-lived. That’s because much of the lost productivity comes from executives spending time planning and preparing, and uncertainty about Brexit should fade over time.

Other potential causes of underproductivity in the UK run deeper. Soumaya Keynes says the lack of investment in business and industry from both government and the private sector is one of the biggest impacts. And not just the kind of investment that buys new equipment that helps people do their jobs better.

“There are intangible investments that aren’t as easy to grasp, like building brands or intellectual property or designing better processes; this other type of investment, which is much more difficult to measure but is very important in a service-based economy like the UK.”

According to Keynes, the amount of money the UK government spends on corporate investment is relatively small compared to the private sector, but the government has a crucial role in creating the conditions that encourage private sector corporate spending.

“A necessary condition for healthy investment is certainty and stability, and business expectations that there will be a strong economy and healthy demand,” says Keynes. “It’s really these necessary conditions that haven’t really been met in recent years.”

This lack of investment has left the UK lagging behind its peers. A report from the London School of Economics and the Resolution Foundation Think tank found that business investment in the UK accounted for 10% of gross domestic product in 2019, compared to an average of 13% in the United States, Germany and France. And the British government also spends much less on research and development.

Low investment coupled with an education deficit, skills gap and deep regional inequality are further complicated by a Byzantine planning system it’s so decentered and bureaucratic that it’s really, really difficult to build anything in the UK. Taken together, these impediments present a serious, long-term and systemic impediment to productivity improvements in the UK. And to be fair to Liz Truss, she wanted to address these issues in her mini-budget. The problem, says Keynes, was that it tried to combine reforms aimed at this obstacle with a package of big tax cuts at the same time.

“I think their sequencing was wrong,” says Keynes. “When you take a step back, your main goal was growth, and that’s admirable. Well done Liz Truss, identifying this huge problem and really trying to solve it.”

But Truss was naive, says Keynes. “There are huge stakeholders who want the current planning system to stay the way it is. And with her announcement of many unfunded tax cuts, investors spooked. We have a hostile global economic environment: it was a very risky environment to try.”

Stuck in an unproductive rut

The UK is in a bind because of its low productivity and growth, which has been exacerbated by external problems in the global economy – notably the war in Ukraine. If Britain wants to increase productivity, it needs to boost investment. But in the current economic context of high inflation and fiscal woes – and a bond market that doesn’t allow for much more borrowing – that means cutting domestic spending, which will strain budgets at a particularly difficult time and cause pain for years to come. The LSE Resolution study estimates that increasing business investment funded by domestic resources could generate an additional 8 percentage points of GDP growth over 20 years, but it could take 15 years for household consumption to recover from an initial decline.

Another way is to attract foreign investment, but a big part of that will involve lowering taxes. The death of Liz Truss shows how difficult it is to enforce such a policy when inflation is high and citizens are bracing for a harsh winter.

Poor Lisa. She had dealt a bad hand from the start. Her successor is unlikely to do much better in the shuffle.

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