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Fixing a fragile economy

If soaring inflation (now at 9.1 per cent, and heading for double digits) and moments of anguish at the petrol pumps weren’t enough to persuade you that Britain has returned in spirit to that most troubled of decades, the 1970s, then this week’s crippling rail strikes, the biggest in years, will probably have done the job.

The strikes were called by the RMT union over pay and job cuts. But in keeping with the mood all those decades ago, simmering anger over pay and other issues isn’t confined to the rail workers, and could soon boil over into more widespread industrial action.

Pay isn’t keeping up with inflation and workers are demanding more. In the private sector, there's a growing trend for companies to help tide their staff through the cost of living crisis with one-off lump sum payouts, while avoiding an irreversible increase in their wage bill, but in the public sector there's a stubborn mismatch between inflation and government plans for pay awards. Ben Zaranko at the Institute of Fiscal Studies has pointed out that in April 2022, average pay in the private sector was 4.3 per cent higher than in January 2010, after adjusting for inflation. But in the public sector, it was 4.3 per cent lower. 

Teachers claim they have lost 20 per cent from salaries in real terms since 2010 and want a pay rise that addresses that gap. Other disputes predate the pandemic – university lecturers for example have been cancelling lectures and other types of teaching for a number of years over cuts to their pensions.

This public sector pay challenge “couldn’t have happened to a nicer government” quipped one reader under an FT story on the issue. But it’s not only a problem for government. Spiralling wages are not something businesses and the Bank of England want to see either. 

Nor is a pay battle the only problem biting at the government’s ankles. In this post-Brexit, post-pandemic growth-starved world, the government’s productivity growth lever is simply not working. Fixing that is a priority but far from straightforward. Productivity growth remains our longstanding problem. 

The government is beckoning others to follow its lead as it tries to tackle this. This month the Department of Digital, Culture, Media and Sport released a paper outlining how it’s supporting Britain’s goal of becoming a global science and tech superpower. It thinks the UK tech sector could add close to 680,000 jobs and billions of pounds to the economy by 2025. It is seeding that growth through funds for research & development, and education, and is encouraging institutional investors, especially pension funds, to increase their own investments into new technology. Encouragingly, ONS stats reveal that while new business creations in the first quarter (Q1) were dominated by construction company births, those in the Professional, Scientific and Technical Activities sectors were not far behind.

But business investment which is essential to building the high skill, high wage economy the government is banking on, is not rising. It dropped by 0.5 per cent in Q1 this year, and it is down 9.1 per cent on the pre-coronavirus level. Other countries continue to have higher investing rates but in the face of rising costs (the cost of raw materials to UK producers – input prices – rose by more than 22 per cent in the year to May, the highest rate since records began in 1985), the end of the era of low interest rates, the planned increase in corporation tax, and recession nerves, UK businesses are not likely to be considering altering their habits just yet. 

Further headwinds include Brexit, which for now, as previously predicted by the Office for Budget Responsibility, is a downward pressure on productivity and investment levels. 

A lot is riding on the super deduction tax relief introduced by the chancellor last year, and even more so on its successor which will take its place next year. The Treasury is currently consulting with, and hopefully listening to, businesses on what types of reliefs and allowances would encourage them to pump more capital into their companies.

But what matters above all is the return of business confidence and certainty about the economy. When that happens, one or other of the fuses needed to fire up growth may just catch.