A New Economic Model?

This week, the Conservative Party proclaimed a new economic model at their ‘love-in’ in Manchester. They aspire to a high-wage, high-skill, high-productivity economy. Is their vision credible, asks Victor Hill?

Crisis? Which crisis?

Mr Johnson’s government has staggered out of the nightmare of the coronavirus pandemic − only to lurch into the ‘new normal’ of the supply-side crunch, as manifested by bad-tempered queues at petrol stations and widespread labour shortages which, we are told, portend a sad Christmas without turkeys or toys.

Healthy swine are being culled on farms without entering the food chain because of a lack of butchers and packers. The army has been dragooned in to drive fuel tankers. All this, according to Europhiles, is a direct consequence of Brexit and evidence of monumental Tory mismanagement. For some, it even anticipates the end of capitalism.

There are in fact several overlapping crises in play, not just confined to the UK, which arise from fundamental shifts in the way we are likely to do business in the post-Covid world. The curious case of the missing lorry drivers is instructive and points to a new paradigm.

Lorry drivers are key workers

Britain is short of an estimated 100,000 lorry drivers. Suddenly, lorry drivers are cool and their salaries – not before time – are rocketing.

But we now know from ONS statistics that fewer than 10,000 European lorry drivers left the UK after Brexit. Further, of the 46,000 drivers who left the profession between 2016 and 2020, only 9,000 were European nationals. The haulage industry was warning about a prospective lack of drivers even then. In fact, there was a pessimistic transport select committee report on the subject in 2016 − before the Brexit referendum.

Everybody (or almost everybody) anticipated that – even if Brexit had not happened – the pay differential between the UK and Poland/the Baltics was eroding over time. Just compare the sterling/zloty exchange rate since 2003 until now; and then consider the rapid rise in real wages in eastern Europe over the same period. Many Poles have concluded that, after 17 years of working like Trojans in the UK, they can go back to that wonderful land of meadows and pine forests, build a nice house and get by quite nicely.

Millions of others have decided to remain here under the EU Settlement Scheme because they and their children are deeply embedded in British life – and that is great, too. But the effect of free movement in practice was a race to the bottom – especially since the accession of nine eastern European countries to the EU coincided with Gordon Brown’s introduction of in-work benefits (Working Tax Credit). Put bluntly: the influx of eastern European workers after 2003 pushed down wages.

People have been leaving the trucking profession through natural attrition for some time. But older drivers, used to the privations that lorry drivers encounter have not been replaced with young recruits. In 2013, 45 percent of drivers were over 55; but by 2020 the over-55s accounted for 54 percent of all truckers. Moreover, during the various lockdowns of 2020-21, thousands of heavy goods vehicle (HGV) driver tests were cancelled by the Ministry of Transport, inhibiting the flow of young blood into the industry. Incidentally, I’m told that the HGV test format determined by EU regulations has not been streamlined at all since Brexit.

One might have assumed that the haulage industry and those who rely on it – for example our world-class supermarket sector – would have acted sooner to forestall a dearth of drivers. Instead, they allowed truckers’ pay to decline. In fact, their pay has not even kept pace with inflation since 2010. Truckers’ pay is now generally higher in Europe, which might explain why only 47 European drivers have applied so far to the government’s ‘visas-for-drivers’ scheme which was supposed to offer visas to 5,000 foreign drivers, until Christmas. That hastily concocted initiative now looks entirely futile.

This is now an industry where only one percent of drivers are women, only two percent of drivers are under 25 and the average age is 55. Should we be surprised? Lorry drivers usually have to sleep in their vehicles overnight parked in lay-bys where they are vulnerable to criminal gangs. Some have even been gassed while they slept. Very often, they do not have access to bathroom facilities, so they have to go without a shower for days.

Many of the traditional truck-stop ‘greasy spoons’ and ‘caffs’ have closed in recent years in the UK, so truckers now have to go to Costa with the rest of us, instead of tucking into a hearty sausage sandwich. In contrast, France is a much more trucker-friendly country, where the Les Routiers sign heralds a tasty, inexpensive meal. The lack of decent lorry parks in the UK is the single biggest deterrent to those considering a career in the industry. That is one area where the government could help – but nothing is going to happen overnight.

It is lonely work and truckers often only get to see their families at weekends. Ordinarily, British truckers are restricted to 56 hours on the road per week. However, this restriction has now been relaxed to a maximum of 10 hours per day, with up to two days of 11 hours, at least until 31 October.

A government that has lashed itself to the mast of net zero carbon might have been inclined to try to direct more freight haulage off our roads and back onto our railways, which were the backbone of the British supply chain right up until the 1960s. But Boris & Co. have had nothing to say on that theme. Strange.

Food miles

I’m fascinated by an ideological rift which is developing within the Tory party over the emotive issue of food distribution. It cuts to the core. And it resonates with the massive altercation over the repeal of the Corn Laws in the mid-1840s. That episode resulted in the fall of prime minister Robert Peel – and the rise of the modern Conservative Party itself.

The issue was exemplified this week by Chris Loder MP, a Tory backbencher who is a lifelong farmer, with deep roots in beautiful Dorset which he represents. Speaking at a fringe event at the Conservative Party conference, Mr Loder said it would be a jolly good thing if supply chains were smashed; then farmers could sell milk in the village shop just like in days of old. In contrast, the new foreign secretary, Ms Truss, is a Peelite. She recently said that Britain was pursuing global free trade for the same reason that Britain abolished the protectionist Corn Laws.

Unsurprisingly then, the party is split on the not-yet-completed trade pact with Australia which would prospectively pitch Aussie beef ranchers against their British counterparts. Personally, I think it’s more complicated than supermarkets versus farm shops. It is difficult to imagine the British abandoning their supermarkets (which are, by and large, brilliantly run businesses) in favour of high-end farm shops like Jeremy Clarkson’s Diddly Squat Farm Shop – fun though it is to rub shoulders with the Beckhams while buying ‘cow juice’ at £1 a pint.

But I do think that domestically produced food should be prioritised over imports on grounds of food miles, animal welfare and the health benefits of eating mindfully and seasonally, as our ancestors did. Much as I revere our countryside and the amazing farmers who sustain it, I still think Minette Batters, leader of the National Farmers’ Union, and her tribe have been asleep at the wheel when it comes to abattoir capacity. They have allowed a disaster waiting to happen, to happen. At least abattoirs are now permitted to recruit serving prisoners in Norfolk − a win-win.

“This is not a command economy”

As numerous ministers have mooted, the UK is not a command-and-control economy; and labour shortages, along with shortages of goods, are best regulated by the laws of supply and demand rather than by ministerial fiat. Let’s make that point clearer. The British government is not supposed to do supply-chain management – even during World War II the government fiddled with supply chains only at the margins. That kind of thing is much better left to the experts such as Sir Terry Leahy, who has just fronted the takeover of Morrisons by US private-equity giant Clayton, Dubilier & Rice.

If you pay higher wages without increased productivity, you will just get inflation. In order to boost productivity, you need investment. Mr Sunak’s regime of ‘super deductions’ is a step in the right direction as it will encourage new capital investment. But results will take time to feed through. And investment does not just mean dazzling software, robotics and gizmos: it includes human-capital investment such as childcare facilities and digital democracy (that is, everybody must have access to super-fast broadband).

It is now clear, post-Brexit, that ‘UK plc’ simply has not been taking sufficient care of its workforce. The natural instinct of British business has been to engage cheap, foreign labour which can be laid off as and when. It has been reluctant to invest in training and automation – this is nowhere more apparent than in agriculture. Progressive management understands that you get the best out of people by nurturing them. That means providing decent working conditions, paying them as well as you can and ensuring that workers have better skills than your competitors. But British business over the last quarter century or so has been too focused on the bottom line and has allowed working conditions and skills to decline, as in the haulage industry.

UK plc has also become addicted to just-in-time management practices with minimal reserves of almost everything. This tendency now poses grave dangers in terms of energy security and food security. France has 14 weeks’ worth of gas supplies in storage; Italy has 11; and Germany has eight weeks’ supply. Britain has an estimated four-to-eight days’ gas reserves. It is a similar story with food. And most food supplies enter the country through a few pinch points, most notably Dover. When French fishermen blockade Calais next month the results will become apparent on our supermarket shelves within days.

It may well be that we need to shift to a new model of higher wages, improved skills and better automation. But it is not clear how that can be achieved without severe, short-to- medium-term dislocation, in terms of price hikes and supply-chain disruptions.

Last week, the Business Secretary, Kwasi Kwarteng MP, accused British business of “resisting the transition” from a low-wage, high immigration model to a high-wage, higher-skilled economy. Richard Walker, chief executive of Iceland, the privately owned supermarket chain, appeared to agree. However, he admitted that the transition will not be easy because supermarkets subsist on very tight margins. Iceland faces an increase in its fuel bills alone of £20m next year. That will have to be passed on to shoppers.

Some companies are already responding to the challenge. EG Group, the petrol-forecourt operator owned by billionaires Mohsin and Zuber Issa (now the owners of Asda too) announced last week that all 10,500 employees would get a pay rise of more than five percent amidst chaos at the pumps. All employees over 18 will immediately earn a minimum of £9.50 per hour, rising to £10 per hour for more experienced employees. Waitrose (part of the John Lewis Partnership) is advertising for drivers at £1,590 a week – that’s more than an MP earns. Quite right too.

Then there is education. For some time, it has been apparent that our schools and universities are not producing youngsters eager to work in the caring professions, on farms or in the hospitality sector. Why? Because they are not informed about the extraordinary potential for fulfilment in those professions – plus, of course, the image of poor pay and dismal working conditions. There needs to be a change of culture.

And what about the huge number of asylum seekers awaiting news of their status from the Home Office? Were there any truckers or butchers in the dinghies that have disgorged 30-50,000 illegal entrants (nobody seems to know) onto the shores of Kent these past five years? Or amongst the tens of thousands who fled Kabul in British aircraft bound for the UK? At present, these people – whether you regard them kindly or otherwise – are disbarred from working at a time when we need all the skills we can get.

In my view, Mr Johnson should have announced a major hike in the minimum wage on Wednesday this week – to the £15 an hour sought by the Labour left. Instead, he announced a new figure of £9.42. The former hourly rate would have pulled the rug from under Sir Keir Starmer’s feet. This is not a left-wing policy but rather a Thatcherite one. Businesses that cannot afford to pay decent, liveable wages are simply not viable and should be put out of their misery. Their staff should be upskilled and redeployed. If that means paying a bit more for your favourite takeaway, then so be it.

The problem is that with inflation running at four percent – and possibly higher by next spring – the purchasing power of pay rises will be eroded quickly. Add to that increases in national insurance contributions from next April (what I call COC – the cost of Covid) and significantly higher council taxes. And then there are soaring domestic energy bills (exacerbated by the decarbonisation agenda), rising petrol costs and rocketing food prices. No wonder pundits are warning that the ‘Autumn of Discord’ will be followed by the ‘Winter of Discontent’.

The most extreme discontent will be in the field of government finances. When the Bank of England is finally obliged to raise interest rates, the cost of servicing Britain’s £2.2 trillion debt pile will start to soar. That, in turn, will necessitate further tax rises …

But let’s not despair. This is a period of transition and I am ‘glass-half-full’ about it. One doesn’t have to be a ‘Borisian boosterist’ to foresee upside opportunities.

That said, with my risk analyst’s hat on, the downside risks are sobering. We could be looking at a sudden slump in living standards unseen in my lifetime – here and abroad. That would have political consequences. Already, the young are much less well-disposed to capitalism than my generation because they are taught that it is responsible for climate change. (I argued here one year ago that only capitalism will save the planet – but not everyone agrees). The consequences of a collapse in living standards, combined with the prevailing ideological confusion, could be dire.

I’ll expand on that soon. For now: invest only in companies which offer their employees the prospect of fulfilling work, continuous personal development and rising wages. That’s what “levelling up” means.