After last week’s Budget, we now have a clearer picture of what May and Hammond’s economic policy will look like over the next few years. Their mission is to produce a high wage, high skill economy which benefits all of the UK’s regions.
Since the Financial Crisis, wage growth has stalled despite a significant reduction in unemployment. The key to boosting wage growth is to solve the UK’s ‘productivity puzzle’. Although UK productivity has returned to pre-crash levels, it is now 19% below the G7 average in 2015. May and Hammond are rightly giving this problem the attention it deserves.
As welcome as the Government’s proposals are for public investment in infrastructure, science and innovation, training and skills, and regional growth, there has been too much reliance on state intervention for solutions. The Government and the Bank of England should consider more market-orientated solutions as well so competition can drive forward improvement in productivity.
Here are just a few ideas to help unlock the UK’s economic potential:
- Monetary Tightening: The Bank of England’s loose monetary policy is holding back growth and productivity. Low interest rates have created ‘zombie firms’ and increased the likelihood of high inflation. It has encouraged debt fuelled consumption which is not a path towards sustainable economic growth. There should be an immediate 0.5% increase in the bank rate and an end to the quantitative easing programme so a more productive allocation of capital can take place in the economy.
- Bankruptcy Law: UK bankruptcy law is failing unincorporated small and medium sized businesses and diminishing the risk-taking which is vital for any vibrant entrepreneurial culture. Many SMEs are not covered by the same administration procedure as incorporated businesses when they run into trouble, and the law fails to allow entrepreneurs to overcome the costs of failure. This inhibits the creative destruction which leads to the productive allocation of resources in the economy.
- Competition Law: One of the most unpopular constraints on the UK’s productivity has been the growth of multinational corporations. Across Western economies, private oligopolies have been taking form, such as in the UK broadband market which is dominated by the inefficient ‘quasi-monopoly’ of BT Openreach. There is a strong case to be made for more stringent competition laws which prevent auctions, takeovers, and mergers which threaten to reduce competition.
- Gender Pay Gap: A major drag on productivity is the lack of working mothers in the UK labour market. Motherhood causes the gender pay gap in the UK to rise by 14%, and the dividend for the economy from attaining greater gender equality in pay is estimated to be as much as £600 billion. One way of tackling this problem is to deregulate childcare in order to lower costs for working mothers. This would help create a more flexible labour market which is crucial for raising productivity.
Market-led solutions can play a positive role in the economy to help increase productivity through robust competition. The Government should realise this and not limit itself to state interventionism if it wishes to unleash renewed growth in the UK economy.