In 2022, the UK economy narrowly avoided falling into recession as there was no economic growth in the final three months of 2022. This is bad news, and it is another sign of inappropriate governance; in realty the UK economy is experiencing a long-term process of economic decline. I have been researching, writing, and advising about regional economies for over 30 years, and I have yet to find a British politician who really understands the drivers behind economic growth or the processes that create wealth and jobs.
For far too long the UK economy has been underperforming. The usual recent explanation for this underperformance is Brexit. Brexit is a factor, but it is not the primary explanation as this decline goes back decades.
There are many factors that account for the current state of the UK economy. The primary factor can be described as a process of ‘erosion from below’ that is placed in the context of ever deepening globalisation.
Evidence of this erosion comes from the recent decision by AstraZeneca to invest in a state-of-the-art factory in Dublin rather than the UK. The explanation for this locational switch was the high costs of doing business in the UK.
It is worth noting that, compared to the UK, Ireland is a well-managed national economy with lower corporate taxes compared to the UK. Ireland is also running a budget surplus that comes from taxing businesses. Ireland has managed to develop an environment that is supportive of business and this approach then encourages job makers and leads to taxation revenue.
Erosion from below reflects weaknesses in the wider framework conditions that support and encourage job makers, innovation and new firm formation.
All job creating companies located in the UK highlight key barriers to growth and these include hard-to-fill vacancies and often impossible-to-fill vacancies, skill problems reflecting issues in the educational system, over-regulation, taxation that does not encourage job creating activities, spatial planning problems, infrastructure bottlenecks and energy volatility.
In many cases, energy volatility is not the problem, but the ability to access the type of supply required by a company in a specific location. There are companies that are unable to grow because they are unable to obtain the energy inputs required. This reflects a local issue and is a classic example of erosion from below.
It is time for all political parties to recognise that there are fundamental problems with this country’s wider framework conditions that are meant to support economic growth and that require immediate attention.
There are many difficulties. The popular media and political narrative is that job creators are to be taxed so that they contribute their fair share to support the funding of public services.
There is no question that businesses should be taxed, but the taxation system should also encourage and stimulate job making activities. No politician really appreciates that businesses take risks and must balance risks versus rewards and in this process they create jobs. The tax take that comes from this activity needs to include taxation revenue collected from the business as well as from employees.
A company that creates many well-paid jobs should be encouraged and supported by a taxation system that recognises the contribution that is being made to the UK economy.
A key problem is that economic erosion from below is a long-term process that can be traced back decades. All UK political parties are accountable for this erosion and every politician is part of the problem but holds the solution in their hands.
This solution is to recognise the drivers that support job making activities, innovation, and entrepreneurship and to formulate and implement a long-term process of supportive interventions. This must be a long-term strategy. Erosion from below is a long-term slow burn process that is explained by too much political interference in the activities of job makers.
Economies that are more successful than the UK have developed a longer-term approach to enhancing the wider framework conditions. This means that the policy environment evolves gradually rather than companies experiencing rapid alterations in policy. Continuity across the wider framework conditions is essential.
Joined up long-term thinking is required to develop an environment that supports job makers. The recent decision to spit the Department for Business, Energy, and Industrial Strategy (BEIS) into three new departments creating the Department for Science, Innovation and Technology, the Department for Energy Security and Net Zero, and the Department for Business and Trade will not encourage the type of joined up thinking required to address erosion from below.
If this new departmental structure does not facilitate an integrated approach to enhancing wider framework conditions, then this type of Whitehall reorganisation is best described as a process that is similar to rearranging the deck chairs on the Titanic.
In 2018, I set out an integrated or systematic approach to unlocking economic growth by enhancing the wider framework conditions. Chapter 10 of this book identifies 14 priority policy areas that cut across the Whitehall siloed departmental structure.
A key issue is a long-term approach to policy alignment. Thus, this type of integrated sustainable and long-term approach to economic growth is one in which industrial policy is simultaneously a taxation, education and skills, business and trade, energy and water, transport and logistics and planning policy.
A key issue is to focus on not picking winners but on encouraging economic diversity. It also involves ensuring that this country’s wider framework conditions are supportive of job makers. In addition, the UK as a location for business must compare favourably with other countries.
I do wonder how long it will take for the UK to appreciate that the current state of the UK economy is nothing to do with Brexit or globalisation, but all to do with a set of political parties who have failed to understand the drivers behind sustainable economic growth.
Supporting and encouraging job makers leads to opportunities for job takers and then businesses and employees are taxed to fund the provision of public services. The key here is in ensuring that this country’s wider framework conditions support this job making process, and the solution lies in supportive wider framework conditions.