Why is growth so elusive for Britain?

Growth

When I was studying economics at university, the theories of John Maynard Keynes were to the fore. His ideas changed the way economics was practiced by politicians the world over. His idea that investment would produce more consumption and more wealth is known as the ‘multiplier effect’. He expounded that public expenditure should supplement private investment in times of distress.

Keynes ideas were somewhat relegated by Milton Friedman’s direct criticism and monetarist economics, with the control of money being at its centre. Nevertheless, Keynes was the man who was the main advocate for the US Lend Lease programme, the post war loan from the US to Britain, the IMF, the World Bank and of course Bretton Woods.

Many argue that Keynes and Churchill were the two greatest Britons of the 20^th Century. Churchill the political and Wartime leader and Keynes the transformational thinking economist. Indeed, Churchill admitted he much regretted not taking Keynes’ advice not to return to the Gold Standard in the 1920s.

So, in a modern context why is growth so elusive? With high debt levels, everyone wants growth to promise a better life.

There are, as always, many reasons. I have listed eight that I feel are key.

1. How growth is measured: Yardstick economists use the Gross Domestic Product (GDP), the aggregate value of goods and services produced by a nation. However, the components differ like apples and pears. Take the workers in the NHS. The aggregate of nurses’ work and the 800 diversity officers in the NHS cost £40m in employment. One saves lives and the other does not, perhaps making them more complicated. Yet they have an equal pro rata GDP impact. Similarly, a manufacturing based economy, such as China can be measured more accurately than a service-based economy such as the UK.
2. Balance between investment and consumption: Short-termism has led to an imbalance in favour of consumption. This leads to poor infrastructure and an economy overdependent upon imports at the expense of efficient domestic production. Also, investment is carried out differently. The UK has an appalling record in cost escalation and delays for major infrastructure schemes such as HS2. French participants in the construction consortia on HS2 could not understand why it was costing 5x a comparable line in France. The answer was all the environmental red tape and use of cuttings to diminish noise.
3. Rush to net zero: Just look at the green taxes on your energy bill and manufacturing costs in the UK compared with elsewhere. Aside from the CO2 arguments, we are essentially replacing relatively abundant and cheap sources of energy with more expensive new systems that have hidden costs. Additional diverted capital inputs are not producing any greater output so lower growth is achieved despite short term employment opportunities (this kit comes from China; we just put them up and sell them).
4. Extreme ESG finding its way into all forms of life: This enables a country to export all the high carbon tasks overseas and claim it is carbon neutral. Then, it imports dirty overseas products without spoiling ESG data. How bizarre you can export jobs in this way. The authorities are only just waking up to this.
5. Education standards: The Government crows about rising educational levels of school leavers but there are huge flaws in our system. Too many university courses are of no real value and too few students are taking a work-related alternative. Numeracy is way below standards in the Far East, too few scientists and engineers; then there is the rising numbers of pupils who never attend school at all.
6. Immigration: An emotive subject as we are told it is essential to provide growth with an ageing indigenous population and low birth rate, but it seems to wed us to low skilled immigration and depress wage levels. The figures themselves are anything but accurate.
   Official estimates of EU workers in the UK in 2016 totalled 3.7m, yet 5.6m workers of EU origin applied to remain in the UK. Estimates of illegal migrants range from 2m to 5m. Modern slavery for those people without legal right to live in the UK is a continual problem. None of this will be recorded in GDP figures. Numbers discussed are net immigration, gross immigration is more revealing. Last year 450,000 Britons left the UK. Professionals seeking a better life overseas, with doctors going to Australia as an example and retiring people leaving for sunshine and low pension taxes. If we look at employment vacancies, these have been stubbornly around 1m for several years.
7. Non-productive spending: That is not waste in the UK economy counted as GDP but spending with limited impact on the economy. Here we have defence spending. It does bring employment to the UK (and there are export and import aspects) and it is essential, but overall, the UK at 2% of GDP has a much higher defence spending than its peers in Europe. This is spending that otherwise would go on more productive works.
   Seems illogical giving aid to India, when their Government spends vast amounts going to the moon whilst neglecting the undoubted poverty in parts of that nation. A better system would be to give aid in kind, with gifts of British goods or services that have created some manufacturing or service activity here.
8. Culture: An innovative nation no doubt, but the last 20 years have seen more red tape and especially a risk averse regulatory environment. That is why 50% of US citizens own shares and only 19% do in the UK. It is why UK pension funds only hold 2% in UK equities. The desire for regulators to be overprotective to the consumer is a very negative factor.

So, there you have it. A range of reasons for low growth in the UK and by no means an exhaustive list. A lot of work is needed to reverse this as speedily as possible.

If you would like to discuss your current investments or future plans we would be happy to schedule a call – Contact details for the CFM team are here and my contact details are:
E: barrie.newton@capitalfinancialmarkets.co.uk
T: 07977 784167

Barrie Newton, January 2024