Member Article

David Gorton – partner at PM+M – on why something is wrong with the efficiency of Great Britain.

Britain is a modern economy which has been educating and developing its populace for well over 150 years. It has also boasted entrepreneurs and inventors and scientists who have nurtured businesses, products and ideas for much longer. And we have a huge legacy of skills and intellectual property to draw on so… why is there something wrong with the efficiency of this country?

According to government statistics, our employment rate is at the highest it has been since records began (74.6%) and our unemployment rate at 4.6% is very low. We have around 1.6m people unemployed and around 750,000 job vacancies. There is therefore very little capacity for economic expansion through increasing the use of labour. The strong employment rate has been assisted by significant immigration of economically active individuals.

So labour is fully utilised, we are a clever nation with lots of legacy intellectual property and yet the country imports significantly more than it exports and the government is unable to generate enough tax income to maintain adequate public services (services may just about be adequate now – many would say not – but a further 10% cut in expenditure will drop them to a level much of the country will not consider adequate).

This is a long standing problem but it has recently been thrown into sharper relief by figures on real wages – since 2007 Britain is the ONLY significant country which has managed both employment growth and real wage falls. Several countries in Southern Europe managed both real wage falls and employment declines and some countries (notably Germany) managed both significant employment growth and a rise in real wages.

A dramatic transformation is needed to get the country’s economic performance back to the level where it supports the aspirations of the people. There are all kinds of possible changes which may contribute or drive this transformation which are promoted by individuals, think tanks or political parties. The usual suggestions are:

• Improve the skills base of the workforce, allowing productivity growth;

• Drive investment into high growth sectors of the developing economy (bio-tech, software, gaming);

• Incentivise entrepreneurs to innovate by reducing business and personal taxes;

• Improve British industry by opening to the world and bringing global best practice here through foreign acquisitions and investment; -

• Reduce the restrictions imposed on business by government regulation, allowing faster and more effective innovation.

The issue I have with each of these is that none of them are at all novel – each of these objectives has had consistent government policy and business support for at least the last twenty years, albeit with the level of support and mix of funding varying with political climate.

In the last two or three years there have been two additional alternatives being offered by politicians - neither of them actually openly targeted at this issue although if you look hard that is the key objective of many of the advocates. Brexit is one of these novelties: - effectively a turbocharged combination of opening to the world/reduction in regulation coupled with a drastic reduction in available workforce in the hope that this changed environment will inspire innovation previously unimagined to replace lost European business and shine on the world stage. There is no plan for how this might work and no government support to facilitate it. In my opinion it is a staggeringly reckless gamble.

The other novelty is George Osborne’s devolution process. For decades the response to financial, business, social, and technological change was to centralise power in London. Scottish devolution was the first crack in this but sadly Scotland has not used its increased freedom to innovate significantly in economic area (indeed its education system has deteriorated significantly). The various agreements between Westminster and cities/regions across England for transfer of policy and funds should give power to a level of government that hasn’t had power for 30 years at least and allow real change. It’s by no means certain but at least it is new. We should all be shouting for the Northern Powerhouse and its siblings across the country – it’s the best hope we have.

This was posted in Bdaily's Members' News section by PM+M Chartered Accountants .