The UK can and must heal its economic sickness
James Rogan
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The United Kingdom has again been labeled the “sick man of Europe.” This time by the Economist. The description is apt. There is hope, however. The last time the U.K. cured its economic sickness was under policies instituted by former prime minister Margaret Thatcher.
The problem today?
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For one, the British economy is characterized by high prices and stagnant economic growth, in plain words, stagflation. The British people are plagued by labor strikes, a crumbling socialized National Health Service, and a housing market that is the most expensive relative to incomes in 150 years. For the past 14 years, economic productivity in the country has been dismal. From 2009 until today, worker output per hour of labor has been the second slowest among the G7 nations. Only Italy has endured weaker productivity growth. Wage-adjusted earnings are flat with incomes of 2007. What policies should the U.K. adopt to break the productivity malaise and to jump-start per capita income growth?
The first step the U.K. needs to take is to increase gross fixed capital formation. Today, it averages 22% among the countries comprising the Organization of Economic Cooperation and Development, OECD. In Britain, however, gross fixed capital investment averages 18%. To free up resources for increased capital investment, the U.K. needs to reduce the size of government. Currently, the government consumes about 46% of annual gross domestic proudct. In the United States, the comparable figure is around 36% of GDP. Why does this matter?
Because government is less efficient than the private sector. The private sector is the engine of growth and the catalyst for economic innovation. The U.K. can reduce the size of government by slashing its long-bloated welfare budget. Too many Britons live on welfare, doing only the bare minimum necessary to look for jobs. They prefer to have their fellow citizens pay their de facto wages to stay at home and out of the rain.
The people of the U.K. need to embrace the words of Norman Tebbit, a member of Margaret Thatcher’s cabinet. He advised the unemployed to get a bike and find a job. Voters should not tolerate the laziness of others. Especially when it directly affects their wallets and the debt-related future of their children. The U.K. will spend nearly $300 billion on welfare payments in 2023. For a country with a population five times smaller than that of the U.S. (and a GDP eight times smaller), this is a lot of money.
As an extension, the U.K. government should focus on boosting those parts of their economy where the country enjoys a comparative advantage. The U.K. excels in the global services sector. When it comes to value-added services, U.K. exports are almost twice the value of its goods exports. Among global economies, the U.K. has the second-largest market share in traded services. The country is also a leader in services related to healthcare and pharmaceuticals. And Britain also leads when it comes to certain sectors of the global digital economy. The country is the home of Arm, one of the world’s leading semiconductor design companies, for example. Arm technology is so valuable that Nvidia wanted to acquire the company in order to gain access to its intellectual property. Regulators said no.
To the extent possible, British policy should support making London again one of the world’s two leading financial centers. It is unconscionable that the Arm initial public offering will occur in New York City and not London. Other straightforward policy prescriptions would include tax reform, encouraging investment, not consumption. Tax policy should support the value-added services sector, not the manufacturing sector, where the country does not enjoy a comparative advantage. Finally, government should celebrate free market capitalism and not statism or socialism. Too many policy elites embrace a casual if deluded anti-capitalism. Such elites should be pushed to the backwaters of government. They, and the grotesquely over-empowered unions they serve (Google “The RMT drivers salary”), should be called out for the harm they do to the bank accounts and aspirations of average Britons.
Top line: Limited government, lower taxes, and free markets are the highway to prosperity for the U.K.
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.