July 26, 2023 - 10:00am
Once again, Britain is topping the G7 league tables for all the wrong reasons. Recent reports show that besides paying the highest interest charges on its national debt, the country also has some of the worst labour productivity — which is saying something since there are no star performers in the latter category just now.
Some of Britain’s higher interest charges result from a debt-management strategy that leaves the Government more exposed to inflation-indexed interest rates as well as to foreign investors, who own a higher share of national debt than is the case in other G7 countries. Not only has this ensured that interest rates rise in line with inflation, but they also leave the Government dependent on the whims of strangers, as Mark Carney put it and as Liz Truss found to her (and millions of mortgage-holders’) sorrow.
However, the twin failings of high debt charges and low productivity are also probably related. An ageing population produces a rising dependency ratio, meaning that every working person must support a growing number of retirees. Unless a country supercharges its immigration policy, as Canada has done, it must increase what each worker produces just to be able to keep these people in the style to which they’ve grown accustomed. Britain has done neither. Yet both the Government and Opposition, which remain committed to the triple lock on pensions, are determined to maintain the living standards of pensioners.
Since workers can’t keep up with these demands, either taxes or borrowing must rise. At the moment, both are happening in Britain, with taxes rising by stealth as taxpayers are pushed into higher brackets (even though their real incomes might not have moved much). Either outcome alerts investors to the uninspiring long-term prospects of the economy, especially when the rise in borrowing is used to fund current rather than capital spending. In response, investors demand a higher risk premium on UK debt, gradually making the country look in debt markets like an emerging economy. This is the slow downward spiral in which Britain currently finds itself.
Assuming that inflation continues to fall, some of the pressure will ease in the short term. But this won’t solve the problem, merely giving the country a bit of breathing room to find a solution. The Government, whether this one or a future Labour ministry, will have to either find a way to raise labour productivity or make some tough choices — like ending the triple lock on pensions or raising headline taxes.
What’s more, raising labour productivity would itself likely involve tough choices. Over the last decade, one of the most lucrative possible investments was in real estate, beating stocks and savings accounts by some distance. Both the Bank of England and Government juiced property markets with a combination of easy money and demand-stimulating policies, such as Help to Buy and stamp duty cuts.
But — unlike factories or restaurants — once built, houses produce nothing. And because property owners prefer that new houses not be built, since that can inhibit the price of their own investment, governments have repeatedly succumbed to their demands, limiting housebuilding and further inflating this non-productive sector of the economy.
It’s widely accepted that Britain won’t raise its labour productivity very much until it raises its low rate of business investment. To do this would probably require it to reduce the returns on real estate. At the moment, nobody seems in a rush to do that.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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SubscribeFor thirty years at least the central focus of both parties has been to buy middle class votes by artificially inflating house prices whilst taxing and regulating small businesses – where most of us work nowadays – out of existence. It’s hardly surprising that money-printing and the importation of vast armies of unskilled labour has led to a collapse of productivity, falling GDP per capita and degraded public services.
Eight years ago I was working for a surprisingly enlightened privately funded think tank, mostly licking the stamps and opening the doors for the clever people. They had an extremely sophisticated method of data collection that bypassed statistical validity completely but instead focused on accuracy. Their opinion of the future was bleak. The trajectory of the UK economy is consistently headed downwards with nothing likely to improve or alter that situation. It continues awhile until it falls off the cliff, at which point, the peasants revolt.
Eight years ago I was working for a surprisingly enlightened privately funded think tank, mostly licking the stamps and opening the doors for the clever people. They had an extremely sophisticated method of data collection that bypassed statistical validity completely but instead focused on accuracy. Their opinion of the future was bleak. The trajectory of the UK economy is consistently headed downwards with nothing likely to improve or alter that situation. It continues awhile until it falls off the cliff, at which point, the peasants revolt.
For thirty years at least the central focus of both parties has been to buy middle class votes by artificially inflating house prices whilst taxing and regulating small businesses – where most of us work nowadays – out of existence. It’s hardly surprising that money-printing and the importation of vast armies of unskilled labour has led to a collapse of productivity, falling GDP per capita and degraded public services.
Globalism -Fail
Forever wars – Fail
Migration policy – Fail
Green policy – Fail
None of the obsessions of the leadership is about the benefit of the citizens. Therefore all of these issues are not issues of the people, but of someone else, for the benefit of someone else, pushed down through forced consensus by flooding every screen people see with these issues where people are told these are the things to do, and the positions to take.
Globalism -Fail
Forever wars – Fail
Migration policy – Fail
Green policy – Fail
None of the obsessions of the leadership is about the benefit of the citizens. Therefore all of these issues are not issues of the people, but of someone else, for the benefit of someone else, pushed down through forced consensus by flooding every screen people see with these issues where people are told these are the things to do, and the positions to take.
The European countries (including the United Kingdom) are all in a downward spiral together. Since the turn of the millennium, there has been a litany of policy failures in Europe, which has caused it to massively fall behind the United States in terms of economic growth, tech, innovation, and the capital markets. It’s all very well chronicled by Gideon Rachman in the Financial Times, but I summarize some of the main points below.
In 2008 the EU’s economy was somewhat larger than America’s: $16.2 trillion versus $14.7 trillion. By 2022, the US economy had grown to $25 trillion, whereas the EU and the UK together had only reached $19.8 trillion. America’s economy is now nearly one-third bigger.
The seven largest tech firms in the world are American. Only two European firms make it into the top 20 (SAP and ASML).
The US has plentiful and cheap supplies of domestic energy. Europe has banned fracking and is shuttering nuclear power plants.
You have to wonder, could the solution to some of Europe’s biggest problems (including the continent-wide housing crisis) be found in this missing economic growth? Much as it pains me to say it, maybe Liz Truss was on to something?
The US has intelligently secured itself a supply pipeline of cheap and reliable energy BEFORE driving towards green energy purity. They had the sense not to sign up to targets with deadlines requiring technologies to rapidly and magically appear.
.
The fact that this approach is screamingly obvious really makes you wonder about the idiocy of European (especially EU) politicians.
Hear hear!
Americans are far more willing to try new technology. It is not necessarily those who invent new technology who benefit the most from it but those who who implement it and earn the rewards. Murdoch did not invent satellites but he was the one of the first to use them earn money from using them to transmit sports.
It is those who implement new technology successfully first usually make the largest profit margins from it, Gates and Jobs being good examples.
Britain is very good at pure science but very poor at turning it into profits. Turing, Flowers and Berners Lee gave the World computers and the internet but Britain has earned comparatively little from their inventions.
That’s very true. Access to capital is key to turning pure science into products. The USA is where you go for venture capital and IPOs. And it’s more than money: it’s getting an expert or a string-puller on your board. Networks count. And the USA has those networks at scale.
This was well documented in an article last year in The Economist, which said:
But key question remains: why has the USA pulled away from Europe since 2008? Part of it must be energy, as Ian Barton says. That is when the fracking revolution started. Now the USA can start to decarbonize and build battery gigafactories from a position of industrial strength.
That’s very true. Access to capital is key to turning pure science into products. The USA is where you go for venture capital and IPOs. And it’s more than money: it’s getting an expert or a string-puller on your board. Networks count. And the USA has those networks at scale.
This was well documented in an article last year in The Economist, which said:
But key question remains: why has the USA pulled away from Europe since 2008? Part of it must be energy, as Ian Barton says. That is when the fracking revolution started. Now the USA can start to decarbonize and build battery gigafactories from a position of industrial strength.
The US has intelligently secured itself a supply pipeline of cheap and reliable energy BEFORE driving towards green energy purity. They had the sense not to sign up to targets with deadlines requiring technologies to rapidly and magically appear.
.
The fact that this approach is screamingly obvious really makes you wonder about the idiocy of European (especially EU) politicians.
Hear hear!
Americans are far more willing to try new technology. It is not necessarily those who invent new technology who benefit the most from it but those who who implement it and earn the rewards. Murdoch did not invent satellites but he was the one of the first to use them earn money from using them to transmit sports.
It is those who implement new technology successfully first usually make the largest profit margins from it, Gates and Jobs being good examples.
Britain is very good at pure science but very poor at turning it into profits. Turing, Flowers and Berners Lee gave the World computers and the internet but Britain has earned comparatively little from their inventions.
The European countries (including the United Kingdom) are all in a downward spiral together. Since the turn of the millennium, there has been a litany of policy failures in Europe, which has caused it to massively fall behind the United States in terms of economic growth, tech, innovation, and the capital markets. It’s all very well chronicled by Gideon Rachman in the Financial Times, but I summarize some of the main points below.
In 2008 the EU’s economy was somewhat larger than America’s: $16.2 trillion versus $14.7 trillion. By 2022, the US economy had grown to $25 trillion, whereas the EU and the UK together had only reached $19.8 trillion. America’s economy is now nearly one-third bigger.
The seven largest tech firms in the world are American. Only two European firms make it into the top 20 (SAP and ASML).
The US has plentiful and cheap supplies of domestic energy. Europe has banned fracking and is shuttering nuclear power plants.
You have to wonder, could the solution to some of Europe’s biggest problems (including the continent-wide housing crisis) be found in this missing economic growth? Much as it pains me to say it, maybe Liz Truss was on to something?
The article references the “dependency ratio” when referring only to retirees. The dependency ratio that really matters is the proportion of workers compared to those on out-of-work benefits.
The article references the “dependency ratio” when referring only to retirees. The dependency ratio that really matters is the proportion of workers compared to those on out-of-work benefits.
Uh – instead of ‘supercharging immigration’, how about supercharging birthrates? Put into effect policies that make it quicker, easier, and cheaper to have and raise kids, and you won’t need to import the Africans, the Asians, and the Europeans in their millions.
Uh – instead of ‘supercharging immigration’, how about supercharging birthrates? Put into effect policies that make it quicker, easier, and cheaper to have and raise kids, and you won’t need to import the Africans, the Asians, and the Europeans in their millions.
The housing crisis is the major cause of Britains economic malaise. Every penny hoovered up by extortionate rents (before we even talk about the fact an increasing number have little chance of owning a family home) is less money they are able to spend in the wider economy that creates jobs and growth. If customers have no money to buy products, businesses can’t expand or invest in new technologies to improve productivity. Excessive investment in property rather than industry also leads to a lack of capital to fund new automation. Excessive low skilled immigration also acts as a disincentive to investment in improving productivity, as it reduces wages meaning its cheaper and easier to simply hire more labour instead of increasing the output of each worker.
My solution would include the mass building of new council houses, whereby rents could be set at around 20% of household income leaving more money to spend in the wider economy or to save towards a deposit. Reducing the demand for private rentals would also cause rents to drop, as well as house prices when investors sell up due to no longer being able to charge high rents.
Higher tax rates on property investment, and lower tax rates for businesses or tax breaks for those that invest in research and development.
Finally a much more stringent immigration system that only allows in highly skilled people on top salaries or in areas of critical shortages. The numbers limited to hold the population steady rather than increasing
The housing crisis is the major cause of Britains economic malaise. Every penny hoovered up by extortionate rents (before we even talk about the fact an increasing number have little chance of owning a family home) is less money they are able to spend in the wider economy that creates jobs and growth. If customers have no money to buy products, businesses can’t expand or invest in new technologies to improve productivity. Excessive investment in property rather than industry also leads to a lack of capital to fund new automation. Excessive low skilled immigration also acts as a disincentive to investment in improving productivity, as it reduces wages meaning its cheaper and easier to simply hire more labour instead of increasing the output of each worker.
My solution would include the mass building of new council houses, whereby rents could be set at around 20% of household income leaving more money to spend in the wider economy or to save towards a deposit. Reducing the demand for private rentals would also cause rents to drop, as well as house prices when investors sell up due to no longer being able to charge high rents.
Higher tax rates on property investment, and lower tax rates for businesses or tax breaks for those that invest in research and development.
Finally a much more stringent immigration system that only allows in highly skilled people on top salaries or in areas of critical shortages. The numbers limited to hold the population steady rather than increasing
You didn’t suggest the govt could fire half its employees I notice. These characters don’t have ‘low productivity’ they have zero.
But of course you think helping thousands more dinghys to get across the channel will help.
For them they aren’t stupidly paddling to a sinking ship they’re coming to be another drain on our resources which left me and thousands of others to leave this sinking ship.
You didn’t suggest the govt could fire half its employees I notice. These characters don’t have ‘low productivity’ they have zero.
But of course you think helping thousands more dinghys to get across the channel will help.
For them they aren’t stupidly paddling to a sinking ship they’re coming to be another drain on our resources which left me and thousands of others to leave this sinking ship.
You start by saying ”Once again, Britain is topping the G7 league tables for all the wrong reasons.” – where was your article when (Last year & Year before) UK TOPPED the G7 for growth. Far outstripping the EU Poster Child Germany – which the UK still does! (and for the record, has done since the 2016 BREXIT referrendum).
I am only one sentance into your article but already I can see yet another gloomy ”UK is finished economically” rant (at least no Brexit comment here – yet)
Productivity:
it depends how its measured. Would you say that the Irish Productivity of their fake economy of £511bn is more productive? The ”real” Irish economy is probably around £200bn (if that) much of the rest of ”their” economy is ”leganlised money laundering” but doubtless to you – ”will count as Irish productivity”. 42% of ”Irish Exports” logged dont even come anywhere near Ireland.
Fake News:
We all know (do you?) that tens of billions of £ can legitimately be added to UK GDP because ‘legalised money laundering’ diverts profits & cash actually attributed to UK PLC, is hidden from UK tax man.
Dont get me started on people who chose to retire early, support themselves financially, and therefore are ”noit productive” but doubtless your numebers include them and divide UK GDP to include those as well.
Your priceless quote:
”once built, houses produce nothing”
Honestly? I really have no words to say to that comment.
Please spell out what you mean here. I for one am not getting it. Investment in a car factory produces cars. What, in comparison do houses produce?
well I dont know about you David – but I would rather live in a house than a mud-hut.
Not everythign is created ”to produce something’‘ – thats nonesense in itself and a rather strange way to look at the world. The sky also does not produce anything – and yet it does. Mountains may well be similar.
As is conceeded, a house has had a very beneficial effect on the ecomony as its being built and very much so thereafter – in my case anyway, a house gives a family a home – very productive in my view.
well I dont know about you David – but I would rather live in a house than a mud-hut.
Not everythign is created ”to produce something’‘ – thats nonesense in itself and a rather strange way to look at the world. The sky also does not produce anything – and yet it does. Mountains may well be similar.
As is conceeded, a house has had a very beneficial effect on the ecomony as its being built and very much so thereafter – in my case anyway, a house gives a family a home – very productive in my view.
Please spell out what you mean here. I for one am not getting it. Investment in a car factory produces cars. What, in comparison do houses produce?
You start by saying ”Once again, Britain is topping the G7 league tables for all the wrong reasons.” – where was your article when (Last year & Year before) UK TOPPED the G7 for growth. Far outstripping the EU Poster Child Germany – which the UK still does! (and for the record, has done since the 2016 BREXIT referrendum).
I am only one sentance into your article but already I can see yet another gloomy ”UK is finished economically” rant (at least no Brexit comment here – yet)
Productivity:
it depends how its measured. Would you say that the Irish Productivity of their fake economy of £511bn is more productive? The ”real” Irish economy is probably around £200bn (if that) much of the rest of ”their” economy is ”leganlised money laundering” but doubtless to you – ”will count as Irish productivity”. 42% of ”Irish Exports” logged dont even come anywhere near Ireland.
Fake News:
We all know (do you?) that tens of billions of £ can legitimately be added to UK GDP because ‘legalised money laundering’ diverts profits & cash actually attributed to UK PLC, is hidden from UK tax man.
Dont get me started on people who chose to retire early, support themselves financially, and therefore are ”noit productive” but doubtless your numebers include them and divide UK GDP to include those as well.
Your priceless quote:
”once built, houses produce nothing”
Honestly? I really have no words to say to that comment.
If the UK was a horse you’d be close to deciding to shoot it.
If the UK was a horse you’d be close to deciding to shoot it.
An erroneous introduction to this article caused by only reading an erroneous headline in the linked FT article.
The UK is not paying “the highest interest charges” instead the UK is spending the highest proportion of tax revenue. As the UK is a relatively low tax economy, the percentage of tax revenue spent on interest appears relatively high.
As I commented on the FT:
” The article does not explain that the “interest” includes the indexation increase of the redemption value of the inflation linked gilts which will be redeemed many years in the future.
It is an accounting convention to treat the increase in redemption amount as paid n the current year.
Inflation index linked gilts allow pension funds to better hedge their liabilities and discourage governments from attempting to inflate away national debts.”
Thank you! Way, way ahead of the unheard kindergarten level understanding of capital markets: the comments and observations on the subject here are eye wateringly cretinous!
Thank you! Way, way ahead of the unheard kindergarten level understanding of capital markets: the comments and observations on the subject here are eye wateringly cretinous!
An erroneous introduction to this article caused by only reading an erroneous headline in the linked FT article.
The UK is not paying “the highest interest charges” instead the UK is spending the highest proportion of tax revenue. As the UK is a relatively low tax economy, the percentage of tax revenue spent on interest appears relatively high.
As I commented on the FT:
” The article does not explain that the “interest” includes the indexation increase of the redemption value of the inflation linked gilts which will be redeemed many years in the future.
It is an accounting convention to treat the increase in redemption amount as paid n the current year.
Inflation index linked gilts allow pension funds to better hedge their liabilities and discourage governments from attempting to inflate away national debts.”
Property has been an extraordinarily successful investment in Britain over generations, mainly due to taxation benefits: it has also been the backbone of the highly profitable mass affluent asset management business as such a massive number of people inherit at least £100,000 from a relatives house upon a family death.
Property has been an extraordinarily successful investment in Britain over generations, mainly due to taxation benefits: it has also been the backbone of the highly profitable mass affluent asset management business as such a massive number of people inherit at least £100,000 from a relatives house upon a family death.
John Rapley has a solution to our problem, can you guess what it is….
John Rapley has a solution to our problem, can you guess what it is….
Great article. Only, despite the gloom. As of July 2023, the UK has record employment after the multiple crises of the COVID health crisis and global energy crisis. Furthermore, as of end of 2023, the UK is the fourth largest trading nation and a post industrial knowledge economy with the second largest exports of services, indeed total trade UK plc is off a record high and above all 2020s multiple crises.
Great article. Only, despite the gloom. As of July 2023, the UK has record employment after the multiple crises of the COVID health crisis and global energy crisis. Furthermore, as of end of 2023, the UK is the fourth largest trading nation and a post industrial knowledge economy with the second largest exports of services, indeed total trade UK plc is off a record high and above all 2020s multiple crises.