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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 IPPR Commission on Economic Justice, whose members included leaders from business, trade unions, civil society and academia, conducted a two-year enquiry into the condition of the UK economy. Its final report Prosperity and Progress calls for fundamental reform, setting out a comprehensive ten-part plan with over 70 policy recommendations.
The Centre for Economic Performance analysed the dramatic variation in economic outcomes, pre-Covid. The report concludes greater local control maybe needed to improve economic performance in left behind areas.
The New Economics Foundation analyses the structural failings of the UK economy in three dimensions – environmental breakdown, social services, and people’s sense of a lack of agency and power. It proposes a comprehensive set of reforms to 'change the rules'.
The Trades Union Congress calls for increased public investment in infrastructure, social housing and R&D into low-carbon technologies in order to rebalance the economy and generate sustainable economic growth.
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.
The IMF calls on developed country governments to spend freely, arguing that debt levels can be stabilised without recourse to austerity.
The Resolution Foundation explains why the UK needs new fiscal rules. It argues that one of these should prioritise increases in 'public sector net worth', the value (as a proportion of GDP) of the government’s total financial and fixed assets minus its debts and other liabilities. By focusing on the value of investment not just its cost, this would enable governments to borrow to invest, and allow fiscal policy to play a leading role in stabilising the economy.
The New Economics Foundation argues for a new mandate for the Bank of England. As publicly-owned institutions, central banks should be required to support the long-term public good, including environmental sustainability.
The IPPR proposed a new framework for UK macroeconomic policy to give policymakers a reliable set of tools for combatting recession. The paper offers three areas for reform; new fiscal rules, revision of the Bank of England's mandate and a National Investment Bank.
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)
Drawing on the analysis of its founder and Director Mariana Mazzucato, the UCL Institute for Innovation and Public Purpose argues that government needs to explicitly steer the direction of economic activity in order to achieve sustainable, inclusive, investment led growth. It calls for a 'mission-oriented' approach to industrial and innovation policy.
The IPPR argues that industrial policy must go well beyond correcting market failures. It should seek to change the structure of the economy, including the volume and direction of private and public sector investment and its geographic location.
The Centre-right think tank Onward has called on the Treasury to establish a national investment bank as a tool to "unlock £16 billion in capital for investment in SMEs, municipal infrastructure and project finance to level up lagging regions". They suggest it should be modelled on Germany's KfW.
The Sheffield Political Economy Research Institute (SPERI) established a Commission on Industrial Strategy to examine how the state could accelerate innovation. Its final report calls for a new institutional basis for industrial policy with the aim of shifting the volume and direction of investment.
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 Big Innovation Centre calls for firms to have an explicit duty to pursue long-term value creation and for executive pay to be linked to long-term firm performance. They advocate for shareholders to have differential voting rights and for measures to encourage the inclusion of more long-term shareholders.
The IPPR calls for changes to company law to make it explicit that directors have a responsibility to promote the long-term success of a company and to institutionalise employee representation on company boards.
The Trades Union Congress has called for regulatory reform to give workers a voice in the running of companies, arguing this would boost productivity and overall economic performance.
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.
Co-operatives UK calls for the UK’s city regions to promote and support cooperative business models as a response to Covid-19, arguing they deliver more resilient organisations, decent work and higher worker wellbeing.
Common Wealth calls for the establishment of democratic ownership funds as a way of democratising the ownership of firms and giving employees a share of company profits.
CLES explains how plural forms of company ownership can address local inequalities by ensuring wealth created by users, workers and local communities to be held by them, rather than extracted as profits to shareholders.
CLES's Community Wealth Building Centre for Excellence illustrates where and how local authorities are promoting democratic ownership across the UK.
IPPR argues that big tech companies must open up their data to the public in order to prevent them monopolising the benefits of the digital economy.
The Democracy Collaborative and Common Wealth are undertaking a year-long project investigating the future of public ownership, including developing democratic digital infrastructure.
