Thursday, May 26

A crash is coming if we don’t begin real investment



In 2007, the average value added to the UK economy per employee, at constant 2016 prices, was £48,690.

In 2015, the figure was £49,559 – just 1.78pc more.

The average annual increase in UK productivity during the whole of the eight years between 2007 and 2015 was therefore 0.2pc.

In China, the comparable annual figure was 7.4pc as output per hour per employee rose between 2007 and 2015 by just under 80pc.

What are the Chinese doing that we are not doing? The fundamental answer is that they are investing in their country’s future and we are not.

By the last quarter of 2015, physical investment in the UK as a proportion of our gross domestic product (GDP) – excluding intangible intellectual property – had dropped to 12.7pc.

The comparable world average was about 24pc and the figure for China around 46pc. A recent survey, based on 2012 data, since when the UK position has further deteriorated, ranked the UK at just about the bottom of the class, number 142 – equal with El Salvador – out of the 154 countries rated on how much each devoted to investment as a percentage of GDP.

The net position is even worse.

If we subtract depreciation, running at about 11.5pc of GDP, from the gross figure, we are left with barely 1pc. This is hopelessly inadequate, and made more alarming by two other factors.

One is our rising population, up each year by about 550,000. Around 60pc rises from net immigration and 40pc from births exceeding deaths.

If you divide the total value of all the accumulated assets we have built up (roads, rail, housing, schools, hospitals, factories, shops and offices), which have a replacement value of about £8.5 trillion, by our 65m population, you reach a figure per head of close to £130,000.

This means that, just to stop our accumulated capital assets being diluted down, we need to invest on new assets £130,000 multiplied by 550,000 every year, which is about 4pc of our GDP.

We are actually spending barely a quarter of this amount. No wonder that we have a housing crisis, that our roads are so crowded, and that our schools and hospitals are under so much pressure.

The other factor which is pulling us down is that so little of the investment we do carry out is devoted to the type of assets that really contribute to rising output.

The Industrial Revolution only began lifting living standards when investment started going into machinery, technology and supplementing human energy with power, typically the sorts of activities that light industry is best at exploiting.

The proportion of our gross investment that goes into these critical areas is also pitifully low, at barely a quarter of the total.

Because we have deindustrialised to the extent we have, the UK has very little low and medium-tech manufacturing capacity, where this type of investment can be deployed to best advantage.

High-tech industries, such as aerospace and pharmaceuticals, are a big help, but there are not enough of them.

With manufacturing as a proportion of UK GDP having fallen from almost one third as recently as 1970 to barely 10pc now, services have inevitably become more and more significant.

They now account for almost 80pc of our GDP. But they still account for well under half our export earnings, against over half from manufacturing.

And service industries are notoriously difficult to squeeze productivity increases from.

So here is why both our productivity and average incomes are almost static in real terms.

We spend too little on investment rather than consumption; what we do spend is heavily diluted by our rising population; and much too little goes towards machinery and technology, the only real generators of rising output. We have to ensure our economy is better balanced.

To avoid slipping further and further behind other countries, we really need to get investments as a percentage of our GDP up to 20pc or more.

To reap the benefits from highly productive machinery and technology we need to get manufacturing as a proportion of our GDP back up to around 15pc.

Without these changes, we will never be able to pay our way in the world and avoid running up more and more debt, as constant balance of payments deficits show that we are living more and more beyond what, as a country and as individuals, we are earning.

Are any of these changes possible?

Not in the near future, unless we go through a really radical change in the way we run our economy, giving far more priority to industry rather than banking, to manufacturing rather than services, to the regions rather than the City and to exporters rather than importers.

But in the end, changes along these lines will have to happen. The world is not going to continue for ever to subsidise living standards we are not earning.

We are not going always to be able to keep the wolf from the door by selling national assets on the scale we have been doing in recent years.

We can’t go on selling our ports, airports, rail franchises, energy companies, football clubs, housing and vast swathes of our manufacturing companies every year for ever.

Sooner or later we are going to have to make the adjustments needed to allow our economy to grow on a genuinely sustainable basis.

The big question is whether we are going to get a grip on what needs to be done soon enough to keep the situation under control, or whether, sooner or later, the markets are going to turn on our stagnant economy as we run out of credibility and the pound crashes.