The leaked document earlier this week highlighting that the
UK plans to impose tougher immigration curbs on EU citizens as soon as Brexit
is implemented made for profoundly depressing reading. It certainly did not
play well in Brussels and was sufficiently inflammatory that it could scupper
attempts to start trade talks next month. Aside from the economic damage that
migration curbs will cause, particularly in the short run, a related concern is
how this changes the perception of the UK in the rest of the world. The British
like to portray themselves as welcoming hosts to immigrants fleeing repression
at home. It is hard to square that with the government's current policy which looks
increasingly illiberal on a number of social issues.
Not for nothing did the Archbishop of Canterbury describe the current British model as "broken." I take this man's view on economics and finance more seriously than most other men of the cloth, since the Archbishop was formerly a senior executive in the oil industry and knows a thing or two about business. His comments came in the context of a report published by the Institute for Public Policy Research whose Commission on Economic Justice features senior business and public figures alongside the Archbishop. The report argues very strongly that “the British economy today is not generating rising prosperity for a majority of the population. Economic growth no longer leads to higher pay: the period from 2008 to 2021 will be the longest period of earnings stagnation for around 150 years.” The report further argues that workers are not sharing in the recovery in corporate profitability, which is furthering inequality.
Whilst this is all true, in some ways this is to miss the point. As the Chancellor of the Exchequer pointed out the Gini co-efficient measure of income inequality is at a 30-year low. There does appear, however, to be a deep-seated sense that something is wrong. For one thing, it is not income inequality per se that is the problem – everyone is being squeezed by the downward pressure on incomes as the UK economy struggles to recover from the fallout of the financial crisis at the same time as global competition is intensifying. As the IPPR points out, the UK is one of only six OECD countries where real earnings are still below their 2007 level. There is also a sense that wealth inequality is rising as younger people find themselves increasingly priced out of the housing market. In 1991, two-thirds of those aged 25-34 were homeowners: today that figure is around 36%, with the result that people of any given age cohort own less wealth today than in previous decades. But more than monetary equality measures, one of the biggest unspoken concerns is the apparent lack of equality in opportunity.
Younger generations who have entered the workforce in the last 10-15 years certainly do not have the same opportunities that their parents had. Education is a case in point. University students in the UK finish their studies with debts averaging £50,000 according to the IFS, whereas their parents educations was funded by the state. Even in the 1990s when charges were initially levied, they were relatively small and students graduated with relatively low levels of debt. Worse still, the relatively high paying jobs required to fund student loans (which, it should be noted, are subject to an almost usurious interest rate of 6.1%) are far harder to come by. This in part is the result of financial crisis of 2008-09 which has made the country poorer than it would otherwise have been. It is also the reflection of intensified global competition, which means that many skilled jobs (e.g. in manufacturing or finance) are relocating elsewhere. Automation and digitisation increasingly mean that many students emerge from education without the requisite skills. A generalist degree might have sufficed in the past as young people learned on the job, but that is increasingly no longer the case. A university degree no longer appears to be the passport to riches.
None of these problems are easy to resolve. However, the policy of successive governments to rely on markets rather than the state to improve the UK’s economic prosperity is being challenged as never before. Perhaps we have to accept that given the scale of globalisation, digitisation and environmental challenges, incomes in the UK (and indeed many other western economies) simply will not be able to grow as rapidly as in the past. That makes it all the more important that we get the policy mix right. A little less reliance on monetary policy in favour of more joined-up fiscal thinking would be a start. After all, monetary policy only brings forward consumption by enabling households to borrow more cheaply today but they have to repay those loans in the longer term. Fiscal policy will not resolve all the problems though we can be pretty certain that Brexit will exacerbate the scale of the challenges. It is thus imperative to get the Brexit strategy right – and I am not hearing any indications from either the British or EU side that this is likely to happen.
Not for nothing did the Archbishop of Canterbury describe the current British model as "broken." I take this man's view on economics and finance more seriously than most other men of the cloth, since the Archbishop was formerly a senior executive in the oil industry and knows a thing or two about business. His comments came in the context of a report published by the Institute for Public Policy Research whose Commission on Economic Justice features senior business and public figures alongside the Archbishop. The report argues very strongly that “the British economy today is not generating rising prosperity for a majority of the population. Economic growth no longer leads to higher pay: the period from 2008 to 2021 will be the longest period of earnings stagnation for around 150 years.” The report further argues that workers are not sharing in the recovery in corporate profitability, which is furthering inequality.
Whilst this is all true, in some ways this is to miss the point. As the Chancellor of the Exchequer pointed out the Gini co-efficient measure of income inequality is at a 30-year low. There does appear, however, to be a deep-seated sense that something is wrong. For one thing, it is not income inequality per se that is the problem – everyone is being squeezed by the downward pressure on incomes as the UK economy struggles to recover from the fallout of the financial crisis at the same time as global competition is intensifying. As the IPPR points out, the UK is one of only six OECD countries where real earnings are still below their 2007 level. There is also a sense that wealth inequality is rising as younger people find themselves increasingly priced out of the housing market. In 1991, two-thirds of those aged 25-34 were homeowners: today that figure is around 36%, with the result that people of any given age cohort own less wealth today than in previous decades. But more than monetary equality measures, one of the biggest unspoken concerns is the apparent lack of equality in opportunity.
Younger generations who have entered the workforce in the last 10-15 years certainly do not have the same opportunities that their parents had. Education is a case in point. University students in the UK finish their studies with debts averaging £50,000 according to the IFS, whereas their parents educations was funded by the state. Even in the 1990s when charges were initially levied, they were relatively small and students graduated with relatively low levels of debt. Worse still, the relatively high paying jobs required to fund student loans (which, it should be noted, are subject to an almost usurious interest rate of 6.1%) are far harder to come by. This in part is the result of financial crisis of 2008-09 which has made the country poorer than it would otherwise have been. It is also the reflection of intensified global competition, which means that many skilled jobs (e.g. in manufacturing or finance) are relocating elsewhere. Automation and digitisation increasingly mean that many students emerge from education without the requisite skills. A generalist degree might have sufficed in the past as young people learned on the job, but that is increasingly no longer the case. A university degree no longer appears to be the passport to riches.
None of these problems are easy to resolve. However, the policy of successive governments to rely on markets rather than the state to improve the UK’s economic prosperity is being challenged as never before. Perhaps we have to accept that given the scale of globalisation, digitisation and environmental challenges, incomes in the UK (and indeed many other western economies) simply will not be able to grow as rapidly as in the past. That makes it all the more important that we get the policy mix right. A little less reliance on monetary policy in favour of more joined-up fiscal thinking would be a start. After all, monetary policy only brings forward consumption by enabling households to borrow more cheaply today but they have to repay those loans in the longer term. Fiscal policy will not resolve all the problems though we can be pretty certain that Brexit will exacerbate the scale of the challenges. It is thus imperative to get the Brexit strategy right – and I am not hearing any indications from either the British or EU side that this is likely to happen.
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