The Wilberforce Society and the Cambridge Society for Economic Pluralism are presenting a joint forum on the UK economy, the difficulties it faces, and the conflicting economic philosophies encapsulated in Liz Truss's mini-budget and the Bank of England's previous actions and response to it.
This forum splits the UK economy into five sections: declining productivity; inequality; trade, agriculture, Brexit, and energy; inflation and cost of living; conflicting economic theory.
Norpell Wilberforce and Manuel Lara Aguado have written overviews of each section that will be used as templates for the forum.
Declining productivity
Norpell Wilberforce
Declining productivity is arguably the greatest cause of Britain’s economic woes. The standard measure of productivity is output per hours worked, which is calculated by dividing the volume of goods and services produced by a country (real GDP) by the total hours of work by the country’s workforce. However, to equate this with productivity would be to ignore the myriad interlinking factors influencing it.
This discussion will focus on three of them: lack of apprenticeships and vocational qualifications; rising costs of production; decrease in consumer spending.
Lack of apprenticeships and vocational qualifications
Lack of apprenticeships and vocational qualifications means that there are less workers in skilled sectors. This decreases productivity due to (i) a net lack of skilled workers and (ii) a decline in the efficiency of each worker.
By far the main cause of this lack is insufficient government and business spending. Net government spending on all areas of adult education has steadily fallen from over £5bn in 2009 to just under £3.5bn in 2019. UK business investment in training per employee is half the EU average.
Truss’s mini-budget did not mention education at all, and this shows the under-recognition of this pernicious drain on productivity.
Rising costs of production
Rising costs of production decreases production of, and profit from, goods and services, thus reducing GDP per hours worked. Factory gate prices of British goods increased by 15.7% year-on-year in May 2022, indicating the highest inflation in production-prices since 1980.
Mechanisms behind this:
The skyrocketing increase in energy and fuel prices that are pushing up the price of all aspects of manufacturing, from the price of transportation to sourcing raw materials
The invasion of Ukraine has increased prices of wheat, grains, and fertiliser which have all contributed to rising food prices
Along with the invasion, sanctions on Russia and Chinese lockdowns have disrupted supply-lines which make it harder and costlier to transport and sell parts and goods.
The labyrinthine bureaucracy of customs paperwork incurred by Brexit is also delaying production as it costs money and time to navigate it.
These factors also contribute to reductions in demand as well as supply. The beginning of the pandemic saw a backlog of orders that were a driving force in keeping manufacturing afloat. However, the backlog has been largely worked through and many clients have postponed, rescheduled, or cancelled agreements.
The manufacturing industry is teetering on the brink of recession. CIPS, the world’s largest procurement and supply body, reports that Britain’s PMI (a measure of its manufacturing output) fell from 52.1 in July to 46.2 in October, with new export orders falling to 40.6 - a figure less than 50 is a contraction in activity. With the exception of the 2020 lockdown when manufacturing ceased entirely, this is the lowest level of manufacturing since the 2008 financial crisis.
Decrease in consumer spending
Without customer spending and sufficient demand, manufacturing of goods and services struggles. This is exacerbated as inflation outstrips spending, as the price of manufacturing is not offset by profits from sales:
Barclaycard, which represents almost half of Britain’s card transactions, found that spending on its credit and debit cards rose 1.8% year-on-year in September, the weakest growth since February 2021, and far behind the annual 9.9% consumer price inflation in August.
Consumers are having to spend more on essential items but less on luxuries. UK expenditure on essential goods rose 8% between Q1 of 2021 and Q2 of 2022, reaching a record-high for non-discretionary spending; however, confidence levels in disposable income fell by 23% to -49% over the same period, the sharpest since tracking began in 2011.
Britain’s productivity is beset by a vicious cycle:
Fewer people entering apprenticeships and vocational qualifications → sectors have less skilled workers and fixed job-contracts, meaning that there are not enough workers to produce goods and services → production costs increase
Increasing production costs → the amount of goods and services produced decreases → plummeting consumer spending and confidence
Plummeting consumer spending and confidence → backlogs peter out and new orders do not arrive → less demand for goods and services
Less demand for goods and services → industries must make existing jobs redundant and struggle to attract new apprentices and fund new vocational training → fewer people enter apprenticeships and vocational qualifications.
⇨ thus the cycle perpetuates.
Inequality
Manuel Lara Aguado
We’ve all seen them in our A-Level Textbooks as the 4th indicator of macroeconomic stability, but what does inequality mean - and why is it so relevant in the UK? Unlike Inflation, Economic Growth or Unemployment, inequality is the most recent metric, coming under scrutiny particularly since the late 1990s as both interpersonal and interregional inequality has skyrocketed in OECD nations. In fact, the UK is ranked as the 6th most unequal nation, with a 34.4% GINI coefficient score. Taking inequality as the distribution of wealth through the population, this discussion has various causes and interdisciplinary consequences, but can be viewed in 3 main forms: Wealth/interpersonal inequality, interregional inequality, and intercity inequality. Perhaps the most pertinent is interregional inequality - given the high specialisation of the UK’s economy and the recent discussion of “left-behind” areas, but both interpersonal and intercity inequality must not be forgotten when speaking about political voting patterns and general dissatisfaction with economic elites which has fuelled current polarisation.
Decline of manufacturing regions in North/Northeast
Perhaps the main pillar of Brexit support, as was the decline of the Rust Belt in the American Midwest for Donald Trump, was the traditional Red Wall manufacturing areas. The UK has seen an outsourcing of the majority of its manufacturing which has led to a major decline of previously vibrant economic regions such as Newcastle, Birmingham and the Red Wall. As spoken in declining productivity, rising costs of production - particularly costs of labour, which reached an all time high of 112.10 points in the first quarter of 2022 has led to a race to the bottom, with most low-skilled labour and goods now produced in China, Southeast Asia, or India - benefiting from huge economies of scale.
Major campaigns such as “Levelling up” have tried to diversify these declining regions, and have been a recent electoral focus - particularly as politically-sensitive industries such as coal, steel or other minerals have been struggling with a huge tax burden and have fallen under huge pressure by environmental groups and Net Zero commitments. The question remains of how these regions will be able to enhance their economic competitiveness and regain their competitive advantage. Without sacrificing on the major strides in working conditions, wages, and quality of life, however, it seems like a complete refocus must be enacted. A (traditionally) strong GBP has only put an extra weight on the manufacturing sector when competing with imported products. Previous economic vitality, lack of infrastructure investment and the influx of migrant workers to take the few jobs left in these industries have no doubt created a feeling of resentment, particularly as prospering regions such as London and the Southeast (with their high-skill, service-focused industries) have become wealthier in the process. Moreover, a lack of willingness and strong disaffection to take low-skilled jobs such as trucking or clerking given previous high wages has only made the problem ever-more so complex.
Over-financilisation of UK’s Economic Portfolio
There is no doubt that global economies, particularly the UK’s - have become increasingly specialised and raced to gain their competitive advantage. As manufacturing, agriculture and other sectors declined in favour of more cost competitive production markets, the financial services sector has been booming - particularly since deregulation under Thatcherism in the 1980s, and to a smaller extent as an echo of the repeal of Glass-Stegall in the United States in the last days of the Clinton Administration under the Financial Services Modernization Act in 1991 (GLBA), which allowed banks, insurance companies and investment houses to merge. This brought the explosion of the credit and leveraging industry in the early 2000s with the selling of risky financial derivatives - expanding banking to unforeseen levels. Although the financial crash of 2008 brought certain regulation to the industry and fears of Brexit sent shockwaves to investors, it appears like banking still is relatively unscaped - with London being the de-facto financial capital of Europe, and only overshadowed by New York City on the global stage.
This has brought a tremendous amount of money to London, with the single square mile of the City of London accounting for 3.5% of the UK’s GDP output, or about £40b. In fact, Greater London produced £503 billion while the economy of the London metropolitan area generates around ⅓ of the UK's GDP, demonstrating just how centralised economic activity is - and how not only those not living in London, but those not working the lucrative finance or technology industries within London have been left behind. The issue of decentralisation and devolution brought about by New Labour might be an interesting issue for debate to see how effective it was in promoting regional development - and how the UK can explore its potential in other industries to further diversify its economy away from niche financial services.
Since the opening of Canary Wharf in the early 1990s, this small patch of land has been synonymous with economic power - and its repurposing from a port dock with a lack of activity is the perfect synonym for what the UK’s economy has evolved into.
Cuts to Social Services
Ever since Clement Atlee founded the NHS in the brutal aftermath of the Second World War, the field of social care and social security has evolved massively. The Conservative-campaing hallmark of the pension “triple-lock” - which stated that each year pensions would increase either by the rate of: Average earnings, Prices as measured by the CPI (Consumer Prices Index), or by 2.5% - whichever of the 3 is the highest - is perhaps the most notable recent example. Unemployment benefits have improved, and the UK’s debt to GDP ratio ballooned under COVID as the central government promoted events such as the furlough scheme to keep the economy afloat and much needed investment was provided into healthcare. That said, however, there has been a notable inequality in the distribution of social services - with those in less deprived areas receiving less investment (whilst at the same time being the ones who need it the most).
Although trains and public transport are efficient in the Southeast, a lack of investment in the North and Northeast has made these deprived areas even less appealing in our hyper-competitive modern economies. An argument could be held that greater investment (see Levelling up program above) would make these places more attractive to live and invest. Moreover, recent fiscal programs have been characterised by government expenditure austerity and tax cuts favouring economic elites and investors - one must look no further than PM Truss’ Mini-budget. Particularly since austerity was imposed in the aftermath of the 2008 recession, it appears like this inequality has not ceased. Would greater public sector investment, reformed regional fiscal programs or greater devolution be what is needed to remedy inequality? Or should we continue betting on the most efficient and already established London and the Southeast to push the economy forward (as a more cost efficient way to spend public money)? This debate will leave few indifferent.
Trade, agriculture, Brexit, and energy
Norpell Wilberforce
A crucial external factor driving the UK’s economic woes is trade. As Brexit trade deals become increasingly fractious and confrontational, the UK’s trade prospects are doomful. This section will break trade into the topics of Brexit, agriculture, and energy.
Brexit
The EU has historically been by far Britain’s biggest trading partner. However, Brexit has seen trade between the two plummet. A report by the Economic and Social Research Institute found that UK to EU exports are down 16% compared to a scenario in which Brexit did not occur, and EU to UK exports are down by an even worse 20%. Britain is being left behind, as shown by how EU trade to the UK has not suffered as badly and how the EU’s trade to the rest of the world is growing at a much faster rate than that of Britain’s.
While the UK has imposed few, if any, post-Brexit regulatory constraints on trade from the EU, the British trade now faces full EU customs checks that increase costs and delays. Britain is similarly disadvantaged in trade with Ireland and Northern Ireland, which are still in the EU single market and have become less reliant on UK trade:
Exports from Ireland to Britain increased by 17% over 2022 while imports plummeted by 13%. Exports from Ireland to Northern Ireland also rocketed by 54%, and while the UK was Ireland’s biggest trade partner before Brexit, the US is now neck-and-neck with it.
Brexit has severely damaged trade with the EU and Ireland, and trade between the rest of the world is fast outstripping that with Britain.
Agriculture
The UK’s agricultural sector is suffering.
Exports of food and live animals to the EU decreased by 11.8% between 2018 and 2021
Exports of vegetables and fruits plummeted by a huge 39.7%.
The value of EU agricultural imports dropped by 9% between 2016 and 2021.
A TWS paper on Britain’s post-Brexit agriculture policy highlighted the dangers of plans to scrap the Environmental Land Management Scheme (ELMS - the UK’s post-Brexit agricultural regulations). Scrapping of ELMS involves scrapping key environmental protection policies and laws regarding sewage and river and air pollution. This is worsened by the departure from the EU’s chemical regulatory body, which will cost £800million to replicate in the UK.
The previous agricultural policy seeks to subsidise agricultural production in proportion to the amount of land cultivated. This negatively affects smaller farms and risks further concentrating and centralising agricultural production when agricultural supply-chains are already disrupted.
Europe is facing widespread food shortages and inflation. Butter prices have surged 80% in the year to July, with milk powder up 50% and beef up 28%. The 2022 harvest of UK crops grown in heated greenhouses will be less than half the norm due to inflation in energy prices. All this means that importing and growing food will become hardier, costlier, and more polluting.
Energy
The huge inflation in energy prices largely driven by reduced Russian supply is affecting every aspect of the economy. Deutsche Bank predicted that UK annual prices for gas and electricity will soar by 80% compared to the 40% increase of countries that use the euro.
Support passed by the Truss government capped household energy spending at £2500/year for two years. However, Chancellor Jeremy Hunt plans to shorten that to only cover this winter and it will be scrapped in April. The poorest 10% of households already spend more than three times their disposable income on gas and electricity than the richest 10%, and the energy footprint of the richest 10% is more than five times higher than that of the poorest 10%; as energy prices continue to rise as winter sets in, this will further increase energy inequality across Britain.
Britain must invest in renewable energy. It has committed to closing all coal power plants by 2024 and those that burn oil and gas are expected to be phased out by 2035. There have been welcome increases in energy production from renewable sources; on the 3rd November, wind-power accounted for more than half of the UK’s energy production for the first time ever.
However, the government is planning to close 5 out of its 6 nuclear reactors by 2028. In the 1990’s nuclear power generated 25% of Britain’s electricity, a figure that dropped to 16% by 2020 and will decrease further if these closures materialise. Similarly, Truss’s government vowed to ban solar panels from 41% of England’s land.
While the UK is right to move away from oil and gas and offset energy inflation by boosting wind-power, it must not limit itself to the latter by neglecting solar and nuclear power; to do so would be a rash move at a time when the UK must desperately diversify its energy sources to meet both its climate commitments and domestic demand that has so far disproportionately impacted the worse-off.
Inflation and cost of living
Manuel Lara Aguado
Growing up at the start of the 21st century, many of us skimmed over inflation as an improbable and archaic phenomenon of the 1970s which had no place in the real world outside school textbooks. The main concern had always been economic growth, unemployment (particularly post-2008) and most recently equity, following Piketty’s 2014 trend-setting Capital in the 21st Century. But with record-inflation metrics, 8.8% year-on-year as of September 2022, and the most rapid rate hikes since the 1980s, it seems like our short-sightedness has once again come to light.
Inflation is defined as the general increase in prices and fall in the purchasing value of money, using a common index, usually CPI (which excludes volatile-price goods such as oil) to measure changes in price for household goods. A high inflation rate (defined as % change in average prices from previous year) is undesirable as it means that people are able to purchase less goods and necessities with the same amount of money. In periods of high inflation (usually associated with high growth rates, low unemployment), an economy is said to be “overheating”, with a raise in interest rates being the most common tool used to decelerate the economy and bring price levels under control. The Bank of England raised its base rate to 3% on November 3rd, the highest since before the 2008 recession.
Supply chain disruptions precipitated by COVID and exacerbated by Brexit along with the War in Ukraine and subsequent rise in the cost of energy and fuel (which adds on to the price of almost every good) are generally viewed as the main factors for our current inflation. That said, there are certain UK specific factors which have made it have the highest rate in all of Western Europe.
Depreciation of the £
A traditional source of British pride, especially since the Euro Sovereign Debt Crisis in 2012 and since Brexit, it appears like the Pound has seen better days. The Pound is now trading at $1.16 with the US Dollar, up from a historic low of $1.08 last September but still far below the $1.37 it was a year prior. The pound is trading at €1.15 with the Euro, down from €1.20 less than a year back and far from the €1.50 seven years back. That said, the US Dollar has had a magnificent run in the past year against all other major currencies, not just the Pound (breaking parity with the Euro for the first time in 20 years), particularly as investors flock to it as a reserve currency during times of instability. Moreover, the Federal Reserve (United States’ branch for monetary policy) has been more keen and speedy to set higher interest rates than the Bank of England which has made it appreciate on global markets. Moreover, recent government instability, mainly the Partygate scandal and resignation of Boris Johnson but particularly Truss’s Mini Budget, have kept the Pound down.
But why is a poor pound so bad for the UK, and how has it contributed towards inflation? Touched upon on the trade section, the UK imports about 46% of its food - and with a population of nearly 70 million to feed, it piles up. Food has become relatively more expensive than in other countries because British consumers can now import less food for the same amount of Pounds as before. Secondly, not being in the EU Single Market and the high cost of trucking and transport to the British Isles from mainland Europe has created delays and supply shortages which has only pushed up the price of food (a necessary good), even further. Lastly, as the sale for Oil is denominated in US Dollars (as is most other resources), buying oil for energy has become more expensive in the UK, which added to the already high cost of energy and gas shortage from the War in Ukraine has exacerbated energy prices to unattainable levels for most households, with the energy price cap expanding to 54% in April 2022.
High Debt to GDP ratio (risks of excessive borrowing & QE - energy guarantee/furlough scheme)
Although many will have been accustomed to the Quantitative Easing and low-interest rate environment after the 2008 recession, one must not forget that most of government’s borrowing and fiscal deficit is fueled by money printing by the Bank of England, who in fact has matched 95.9% of all government debt since the pandemic by printing new money. During the pandemic alone, some £450bn was printed to fund expensive policies such as the furlough scheme to help employers and to provide necessary funding for healthcare & other social services during lockdown. Before that, Bank of England printed £445bn in the aftermath of the 2008 recession to “spend” its way out of the negative cycle and keep the economy propped up.
It appears like the backlash of quantitative easing has only been felt now. Observing natural laws of supply and demand, in true Freidman fashion, the high influx of pounds can only lower their value on the currency market, thus pushing the prices of common goods upwards and, ceteris paribus, making people poorer overall. Although wages have also increased in that time, it has not been enough, with cost of living exacerbating even higher in areas such as London. Finally, government policies such as the energy price guarantee have also prompted greater levels of borrowing, as the unstable price of gas and energy might mean higher than expected levels of government spending to match the price.
Regarding Truss’s economic plan, the policy shock versus the Bank of England and their refusal to keep buying bonds brought the value of the pound down, as borrowing for tax cuts and the lack of a convincing plan to investors for their funding made them fearful of higher interest rates, a greater risk premium and higher debt. This has been seen as the last straw, with more “responsible” spending being pushed now by the Sunak administration, which will no doubt entail uncomfortable tax raises and spending cuts. Despite the vulnerable economic conditions, it appears like “balancing the check books” will be prioritised.
Rising Interest rates & Mortgages
Finally, one must not ignore the reverse casualty effects of interest rates - which although initially designed to control inflation can have adverse effects on cost of living and affordability. As mentioned, Truss’s mini-budget has forced the Bank of England to raise rates higher than expected - and this has had an adverse effect on mortgage payments. With most being on flexible mortgages being tied in one way or another to the base interest rate, and with 64% of UK residents owning their own home - this unexpected rise has cost the average Brit around £400 per year in extra mortgage payments. Along with all the other increases in costs, this rise is not to be taken lightly for a market where housing is already significant (and where rents will no doubt continue to rise after a short COVID induced downturn).
More broadly, interest rates precipitate an economic downturn which means many will lose their jobs or business as the high borrowing environment and decreased consumer spending creates tougher economic conditions to succeed in.
Conflicting Economic Philosophies
Norpell Wilberforce
The mini-budget
Truss’s mini-budget and the subsequent response of the Bank of England and Jeremy Hunt symbolise two conflicting economic philosophies.
Truss’s mini-budget was characterised by massive tax cuts and massive borrowing:
Taxes were slashed by £45bn, the highest in 50 years, despite a rare public warning in September from the IMF that “given inflation pressures in…the UK, we do not recommend large and untargeted fiscal packages at this juncture”.
These cuts would disproportionately benefit the rich; almost half of the money generated by tax cuts would go to the richest 5%, with the richest 1% gaining £40,000 a year. Truss simultaneously refused to rule-out cuts in public spending and benefits.
Government debt is predicted to become £190bn this year, over 7.5% of national income and more than 450% higher than the £32bn forecast by the Office for Budget Responsibility in March.
However, as productivity continues declining and inflation keeps rising, this debt will become harder and harder to pay.
Truss hoped that the tax cuts, decrease in government spending, and deregulation of the financial sector would boost growth by “unleashing the potential of the private sector” and that the borrowing needed to fund this would be from understanding investors who could see the British economy would leap forth after this initial giddy-up.
The response
Investors were horrified, and the mini-budget triggered one of the biggest gilt sell-offs in history. Gilt sell-offs occur when investors do not believe that the government can make good on their loans and want to wash their hands of them before they devalue further. The gilt sell-off was part of a wider crash in UK financial markets that caused the pound to nosedive to its lowest value ever and the cost of borrowing to skyrocket.
During the period before Truss unleashed her mini-budget, the BoE had steadily been increasing interest rates to curb inflation while steadily selling bonds in quantitative tightening. By selling bonds, the BoE pushes down their prices and pushes up their yields, thereby raising interest rates across the economy. Pension funds holding over £1tn teetered on collapsing as their holdings suddenly depreciated. The BoE had to make a swift U-turn and buy back £65bn of long-dated gilts in an effort to stabilise the markets and reassure investors.
The challenge
Chancellor Jeremy Hunt must recover £50bn lost by the mini-budget. While reversing the reduction of corporation tax to 19% from 25% and cancelling the 45% tax rate on those earning over £150,000 will significantly help, he must take further careful action. Some of the possibilities are cuts in overseas aid and capital expenditure, and reduced public spending in the next Parliament.
However, Hunt’s options are fraught with political risks: Boris Johnson received wide backlash when he shrank the UK’s aid budget; reducing capital expenditure will diminish growth; reducing public spending would further put strain on public services when the disadvantaged need social protection more than ever, the NHS is increasingly overburdened, and the education system in decline.
The Symbolism
It is crucial to recognise that Truss’s mini-budget emerged from a specific cause and it and the BoE and Hunt’s responses and previous actions symbolise a conflicting economic philosophy.
The “why”
The UK has been undergoing a period of unprecedented decline. The establishment and bureaucracy have bungled through various quagmires such as Brexit and COVID, and have been beset by sectarianism and shockingly poor and disingenuous government. Liz Truss stood as Prime Minister as somebody who promised decisive action and uncompromising priorities unencumbered by technocratic dilly-dallying. This is most saliently symbolised in her polemic against the BoE and her outspoken desire for its independence to be reduced and for it to be more integrated with, and subordinate to, government.
Her firm ideology and desire to free the UK from the fetters of bureaucracy and regulation appealed to party members disillusioned with the flip-flopping and managerial manoeuvrings they saw leading to the country’s woes.
The “what”
Truss’s mini-budget represents a populist economic philosophy that advocates a shock therapy approach of slashing taxes to give citizens more immediate disposable income (even though the increase in income is (i) wildly unequal and (ii) directly undermined by rising inflation and cost of living). The fact that this demands massive irresponsible borrowing and cuts to public service is obscured by the desire for immediate action and more disposable income, and Truss’s Thatcherite rhetoric of biting the bullet as a nation and weathering the storm for the promises of bright sunshine after it.
The BoE and Hunt represent a technocratic and managerial economic philosophy that advocates the careful recalibration of adjusting interest rates and targeted action rather than sweeping measures that have immediately visible effects (even though this calming the storm addresses its causes in a piecemeal and delayed fashion). This is accompanied by efforts to steadily sell bonds and accrue more investment to offset declining GDP and production.
This philosophy is more effective and informed than Truss’s, but has less appeal to the public. Its technocratic manoeuvrings and abstract talk of quantitative easing etc. do not appeal to a public who are understandably frustrated with what they see as the indecisiveness and ineffectiveness of government and want immediate change such as that promised by Truss’s tax slashes. In times of crisis, the public wants action over calibration.
When you don’t have enough food on your plate, you don’t want to hear how a labyrinthine combination of monetary adjustments can make the food cheaper in the long run; you want to hear how you can have more money to spend on food today, even if it might make it more expensive tomorrow.
The tension between Truss and the BoE and Hunt can be explained through differing philosophies of shock therapy for immediate results versus gentle nursing for long term results; it is not surprising to see which one a poorer, hungrier, and colder Britain finds more appealing.