In July, I suggested that despite the gloomy outlook for the United Kingdom, two important positive signals had been overlooked outside of specialist circles.
The first was Greater Manchester’s outperformance in terms of productivity growth, relative to London, which was accompanied by hints that other parts of northern England were also starting to gain.
Second, for almost a decade, London house prices have underperformed the rest of the country (in nominal and real terms) by around 20%.
If the trend persists and reflects growth elsewhere, rather than just falling prices in London (for which there are few signs), it will have a positive impact on social mobility.
I have tried to keep these points in mind following the release of the latest government budget, which underscores the weakness of the UK’s economic performance and policy malaise.
While the country’s dominant center-right and right-wing political parties seem to recognize the need to adopt bolder policy proposals to turn things around, the current Labour government remains behind the curve.
With a large parliamentary majority but hemorrhaging popular support, the party’s failure to act ambitiously has become something of a mystery.
Prime Minister Keir Starmer’s government will inevitably be forced to address at least five major policy errors sooner or later.
In some cases, doing so will mean departing from Labour’s 2024 manifesto, and that should be no problem. It is obvious to everyone that the government’s self-imposed policy straitjacket is hobbling its efforts.
Trade with the European Union
The first issue concerns trade with the European Union. If the government wanted to be bold, it would launch a process to rejoin the single market or customs union.
As Starmer and Chancellor of the Exchequer Rachel Reeves both well know, there is no other way to improve the UK’s trade performance to any meaningful degree.
The second issue concerns real property. While economists will disagree on just about any issue, the UK’s absurd approach to property taxation is an exception. Everyone agrees that it needs to change.
One obvious reform would be to raise taxes on the value of the land, rather than on the property that sits on it
One obvious reform would be to raise taxes on the value of the land, rather than on the property that sits on it.
But if this were too difficult a transition, the next-best solution is a major structural overhaul of the council tax bands (residential tax brackets) to reflect modern valuations, and then to abolish the stamp duty (a tax on property purchases above a certain price), which inhibits housing-market activity. In this case, no Labour pledge need be broken.
The National Health Service
The third issue concerns the National Health Service and its seeming ability to absorb ever more public spending despite negative productivity growth over the past decade, and especially in the aftermath of the COVID-19 pandemic.
When Margaret Thatcher was prime minister (1979-90), the share of GDP spent on education was close to that spent on the NHS, whereas now the NHS receives around 2.5 times the sum allocated to education.
A better-educated workforce would improve economic growth and living standards
Tolerating such a gap makes no sense economically, since a better-educated workforce would improve economic growth and living standards, not to mention generating greater tax revenues and fostering healthier lifestyles (owing to the relationship between education and health).
Tackling this problem would not require a break from the Labour manifesto either, but it would mean ending the party’s tradition of “protecting the NHS” (a euphemism for spending more unconditionally).
State pensions
The fourth problem is the remarkably generous protection that UK pensioners have enjoyed since the start of David Cameron’s premiership 15 years ago.
Because the elderly are more likely to vote than other groups, every party has been loath to get rid of the “triple lock,” the requirement that state pensions rise annually “in line with either inflation, wage increases or 2.5% – whichever is the highest.”
Successive governments have found it easier to default to the craven principle of “not on my watch.” Can Starmer’s government muster the courage finally to do what needs to be done?
Nor has anyone had the courage even to tweak this arrangement along the lines recommended by the Institute for Fiscal Studies, which would simply use average earnings, rather than “whichever is the highest,” to benchmark pensions.
Every policymaker I speak to in private, regardless of his or her political persuasion, agrees that the triple lock is unfair from a generational perspective.
But successive governments have found it easier to default to the craven principle of “not on my watch.” Can Starmer’s government muster the courage finally to do what needs to be done?
Finally, there is the never-ending debate over welfare (“PIP”) payments and the rapidly rising bill for disability coverage.
A few months ago, the Sunday Times reported that around a million people are now claiming all four of the disability payments available – a number that has risen dramatically.
By doing so, they receive an annual income that is about £3,000 ($4,000) more than someone working and receiving the minimum wage. How can this be right?
Someone needs to start showing some ambition in tackling these five issues. The chance to return to pre-2008 rates of economic growth, or higher, is there for the taking.
Jim O’Neill is a former UK Treasury minister and a former chairman of Goldman Sachs Asset Management.
