Why Britain is losing the global race
By Will Straw
David Cameron and George Osborne have set out their stall for the next general election. Britain is in a ‘global race’ with rapidly growing countries like China and India. The phrase appeared twice in the prime minister’s party conference speech, four times in the chancellor’s autumn statement, and is likely to feature heavily in his budget this month. The problem for the country’s two most powerful men is that their policies mean that Britain is losing, not winning.
Critical to gaining pole position is rebalancing our economy away from domestic consumption and towards investment and exports. Indeed, one begets the other. The United States in the 1950s and 1960s, Japan in the 1970s and 1980s, and China in the 1990s and 2000s all show that export spurts tend to be preceded by increases in investment. Neither is happening in the UK.
To stimulate inward investment, the government has bet everything on cutting corporation tax. This has patently failed as foreign direct investment inflows to the UK actually fell from 2010 to 2011 and are barely one-third of what they were before the crash. Meanwhile, our total investment rate is stuck at just 15 per cent of GDP – the lowest in the G7. Nick Clegg recently admitted that the coalition had been wrong to implement Labour’s planned cuts to capital investment. But his government has done little to remedy this. Despite announcing £5bn in December, government capital spending is falling rather than rising.
Trade, meanwhile, was the biggest drag on growth in 2012 and the current account deficit (the balance of all trade, foreign direct investments and cash transfers) last year was the highest it has been since the late 1980s. In October, Cameron claimed that exports to China have grown 40 per cent in two years. This was true when he said it but the increase has now tailed off and total exports fell 1.2 per cent last year. Meanwhile, our share of trade to rapidly growing countries is well below what it should be. Germany made up one-fifth of the European Union’s GDP in 2010 but one-quarter of exports to China. By contrast, Britain made up just six per cent of EU exports to China despite having 14 per cent of the EU’s GDP.
The government is exacerbating this problem by sending out an overwhelmingly negative message to the rest of the world on immigration. Sensible measures, like the points-based system introduced in 2008, are essential to retaining public support in a notoriously tricky area. But the well-publicised net migration target is leading to bad policy decisions.
For example, as a result of the government tightening the screw on non-EU students, Britain is losing market share in the expanding international student market where we are already a world leader. Meanwhile, onerous visa rules and our reluctance to sign up to the EU Schengen agreement on border controls has affected our ability to attract tourists from countries like China, who are four times more likely to visit France. More is the pity, since those that do make it spend five times as much as Americans in stores like Harrods. Little wonder that the Confederation of British Industry has reported ‘a growing sense of anger’ about Britain’s immigration system.
Nor does the prime minister’s rhetoric on Europe help present an image of a country ‘open for business’. By seeking to repatriate key powers with an implicit threat that he would advocate exit if he does not get what he wants, Cameron has left the US, China and India as well as other EU countries with a bitter taste in their mouths when they discuss the UK.
So what more could we be doing? A properly capitalised British investment bank – of the kind operated in every other G7 country – could make strategic financing decisions to improve our transport, energy and broadband systems. This should be accompanied by a smart industrial policy to help foster a domestic supply chain with numerous jobs. It is scandalous that some wind farms, subsidised by consumers, only source one in 10 components from the UK. Britain does not have a single large-scale turbine manufacturing plant. Setting a target to decarbonise the power sector by 2030, as Labour advocates, is critical to giving the renewable supply chain the certainty it needs to set up shop in the UK.
In the global race, human capital is as important as physical capital. But our goal should be a well-skilled society, not simply a high-skilled one. Everybody should have the chance to acquire good qualifications and use their skills at work. We should concentrate on raising skills and productivity in lower-skilled, domestic sectors like retail and hospitality as much as in the so-called ‘knowledge economy’. The government must work in partnership with businesses and trade unions to expand apprenticeships for young people, and facilitate lifelong learning and career progression as showcased in most northern European countries.
Laissez-faire approaches to economic policy, as favoured by the chancellor, have been the scourge of progress throughout time. Those countries really winning the global race combine an active role for government with a sense of long-termism in the private sector. Cutting taxes and hoping for the best is destined to fail. Britain can win the global race but it needs a radically different approach.
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Will Straw is associate director at IPPR
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