How can we overcome years of economic stagnation?
The UK faced multiple economic challenges even before the onset of the Covid-19 pandemic.
Business investment as a proportion of national income is the lowest in the G7, which helps explain the country’s poor productivity performance. The UK’s manufacturing sector is now under 10% of GDP, contributing to a large structural trade deficit. The UK has some of the largest income and regional inequalities in Europe.
The UK has also become a highly financialised economy, in which the financial sector's growth has outpaced the rest of the economy in recent decades.
One of the arguments often made is that investment and innovation are discouraged by the UK's system of corporate governance in which the short-term interests of shareholders tend to take precedence over those of other stakeholders. Coupled with low levels of public investment, this has undermined long-term wealth creation in the economy.
Britain has had a relatively good record of jobs creation. But many of those created are low-wage and low-skill. Many workers are now on temporary, part-time or zero-hours contracts with fewer rights and benefits than full-time employees.
Cheap labour and flexible labour markets can discourage firms from making the investments in training or equipment needed to raise productivity. Both the decline of trade union membership and the casualisation of work have undercut workers' bargaining power. One result is the near-stagnation of average real wages since the 2008 financial crisis.
The Covid-19 pandemic has placed a renewed focus on how governments can use fiscal policy to stabilise their economies and create jobs.
With the base interest rate at near-zero (which means that when inflation is taken into account it is actually negative) the principal tool of monetary policy - changes in interest rates - has reached its limit. The IMF and OECD have therefore recommended that governments spend freely to support hard-hit economies until the recovery is well established.
The policy of 'austerity' - spending cuts and tax rises - instituted in many countries after the financial crisis is now widely seen as having failed. It slowed the recovery and damaged long-term growth (which in the end is needed to reduce debt) by weakening public services and investment. It also widened inequality.
It is widely argued now that governments should exploit low borrowing costs to boost public investment. The Bank of England has been financing a large part of government borrowing during the pandemic and can continue to do so. It can hold public debt on its balance sheet indefinitely, a phenomenon known as 'monetary financing'. (See Monetary Financing.)
There is also growing interest in how central banks could stimulate economic activity by transferring money directly into the hands of households. At the same time there are strong calls for central banks to use their position in the financial system to steer capital away from carbon-intensive sectors.
There is a growing awareness of the role the state plays in driving innovation and how industrial policy can foster sustainable economic development.
In the past UK governments have been dismissive of active industrial policies on the grounds that the market was better at determining where capital can be used most productively. But the UK's poor record of research and development and of investment outside London and the Southeast has prompted calls for a greater role for the state in steering investment towards national economic, social and environmental objectives.
By making strategic investments in particular sectors, such as green industries, an active industrial strategy can kick-start the development and take-up of new technologies, develop new markets for UK companies, trigger greater private sector investment, and tackle major environmental challenges.
A key feature of many economies with a tradition of strong industrial strategy is the presence of state-owned investment banks, with Germany’s KfW often cited as a leading example. This has led to calls for the establishment of a UK national investment bank, to help drive higher investment into innovative firms.
State investment banks work by using the state’s capacity to borrow at lower interest rates to encourage private institutions to lend to projects they might otherwise shun. This could play a leading role in raising investment in poorer areas of the country and in priority sectors. (See our page on Stakeholder Banks)
Corporate governance in the UK is strongly shaped by the principle of shareholder primacy. This means that the interests of shareholders take priority over those of other stakeholders in a firm, such as workers, suppliers or consumers. There is strong evidence that this encourages an excessive focus on short-term profitability, at the expense of long-term investment.
It is argued that the UK’s model of corporate governance should better reflect the wider interests of a company’s stakeholders, not just its shareholders. Proposed reforms include giving firms an explicit duty to pursue long-term purpose or value creation, and to tie executive pay to a range of metrics rather than just a firm's profitability or share price.
A particular focus for reform is the make-up of company boards. Advocates of worker representation on company boards - which is commonplace in many European countries - argue that it would tend to strengthen investment, because workers have a longer-term interest in their companies than short-term shareholders. By fostering a culture of cooperation between managers and workers, it would also boost productivity. There are also widespread calls for mandatory improvement in the gender and racial diversity of company boards.
The ownership of UK firms is highly concentrated. Apart from institutional investors such as pension funds, individual share ownership is dominated by the wealthy, many of whom are based overseas. Since the 1980s successive governments have privatised previously public-owned industries such as rail, water and energy. Few workers hold shares in the firms in which they work and the UK cooperative sector is smaller than in many other countries.
Over recent years there has been increasing interest in how ownership can be widened. One way is through nationalisation, in which the state would take equity stakes in companies in major sectors, such as energy or rail. Another is by giving ownership stakes in companies to their workers. This can be done either through individual or collective employee share ownership schemes.
A particular proposal is for democratic ownership funds, in which firms above a particular size would be required to transfer ownership of a percentage of their equity to funds managed by representatives of their workers. This would widen the distribution of profits and, in the process, give workers a say over how the firm is run.
The idea of widening ownership can also be applied to other assets. For example, in online transactions consumers provide large amounts of personal data for free. This data has considerable commercial value to the firms who collect it. Proposals to reform the regulation of digital companies include making ownership of data a common resource of benefit to the community or requiring private companies to make data publicly available.