(Photo by David Cliff/NurPhoto)

Unproductive investment

A surfeit of supposedly brilliant ideas to politicians is what worries both Lord Lawson and the author of this column

Tim Congdon

This article is taken from the January/February 2021 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering three issue for just £5.

Nations have only limited resources. The allocation of these resources to the most productive ends is crucial to maximising output and achieving the highest possible living standards. Lord Lawson was therefore right to deride Boris Johnson for “economic illiteracy” when the prime minister used the argument of job creation to justify his “green industrial revolution”. As Lawson said, a programme to erect Boris statues in every town and village would create jobs, but “that doesn’t make it a sensible thing to do”.

The state must never be deemed responsible for providing jobs to everyone. Rather the state should allow market forces to work freely so that people are employed where they can produce most, subject of course to their preferences for work and leisure, and for the varying attributes of different jobs. Further, it should hardly need to be said that individuals know what their preferences are in these matters, whereas government bureaucrats do not. 

Unhappily, the British economy seems to have lost the knack of achieving productivity growth. From 2004 to 2019 output per head increased by only 0.6 per cent a year, the lowest number over such a long period since the start of the Industrial Revolution. National output increased more strongly, by 1.5 per cent a year, because employment increased by 0.9 per cent a year. But labour market developments imply that the medium-term prospects from here are much worse. 

Unless something remarkable is about to happen, advances in national output will be limited in the medium-term future to the gain in productivity

In the 15 years to 2019 employment rose from 28.5 million to 32.8 million, or by 4.3 million workers. But the rise was dominated by the effects of immigration, notably from the East European countries that joined the European Union at the start of the period. Non-UK-born employment climbed in the 15 years to 2019 by no less than 3.1 million, while employment of the UK-born advanced only 1.2 million. Looking ahead, Brexit will discourage immigration from the EU. Indeed, immigration may become emigration, as living standards and wages in Eastern Europe catch up with those in Britain, and some workers of East European origins return home. Meanwhile, the number of UK-born people of working age will more or less flat over the next few decades.

Unless something remarkable is about to happen, advances in national output will be limited in the medium-term future to the gain in productivity. To repeat, that has been little more than ½ per cent a year for quite a long time. 

Suppose that the government boosts its spending by, say, 2 per cent a year in this context. Then over time the share of government spending in national output will increase remorselessly. Over a decade the ratio of government spending to output would in fact rise by 16 per cent. 

The UK had a large budget deficit even before Covid-19 hit our economy and society. If the government is now intent on raising its expenditure by 2 per cent a year, it may eventually have to make some very unpopular announcements. To prevent the deficit running out of control and to stop the public debt exploding, taxes would need to rise — in that decade of 2-per-cent-a-year rises in public expenditure — by about a sixth. 

None of the above is particularly complex. The facts on productivity and immigration are well-known. There can be little doubt that working class voters for the Conservatives in the 2019 general election were partly motivated by disillusionment with a Labour Party which wanted the UK to remain in the EU with its open borders and a single, increasingly unified labour market. Whatever Boris Johnson’s cosmopolitan outlook, openness to more immigration would be politically suicidal. 

Rishi Sunak boasts a huge rise in public spending. That must mean big tax increases

Caution and restraint over public expenditure in current circumstances ought to be the watchwords of the political elite, regardless of party allegiance. Unfortunately, our chancellor of the exchequer, Rishi Sunak, thinks on different lines. To quote a key passage from last month’s Spending Review 2020, “The government has kept capital spending over the forecast period as set out in Budget 2020, consistent with delivering the highest sustained levels of public sector net investment as a proportion of [gross domestic product] since the late 1970s. For core day-to-day spending after 2021-22, the government has maintained the assumption of 2.1 per cent real terms increases per year made at Budget 2020.”

Will taxes be higher in 2024, when — if it lasts that long — the present government faces the next general election? Unless the public finances are to be allowed to deteriorate drastically in the meantime, the answer has to be “yes”. And can it be overlooked that an increase in the tax burden discourages work and thrift, and so aggravates the stagnation of productivity?

Johnson claims to benefit from “an indecent amount of brilliant ideas”. But a surfeit of what seem like brilliant ideas to politicians — such as the green industrial strategy, HS2, state aid for shipbuilding and government subsidies for high-tech — is exactly what worries Lord Lawson and the author of this column. All of the green industrial strategy, HS2, et al, will reduce productivity relative to the free-market alternative, in which managements have to ensure that labour and capital are deployed efficiently and profitably. 

Enjoying The Critic online? It's even better in print

Try five issues of Britain’s newest magazine for £10

Critic magazine cover