Who Wants To Invest In The UK?

UK Living Standards Are Falling Down The League Table

Most of the news coverage this month has been about the weather – although as wildfires burn all around the Mediterranean, the UK has been subject to a summer of damp and gloom, with the wettest July on record. There has been much wringing of hands about the “climate catastrophe” – which I shall discuss soon – but little discussion of the economy.

Arguably, the most critical issue of the day escapes analysis: namely, that evidence continues to accumulate that the UK is falling behind its peers in terms of productivity and growth − and thus quality of life too. South Korea, which as recently as 1985 managed on one third of our GDP per capita, has now overtaken the UK on that metric – and Poland will surpass us in the early 2030s if current trends continue.

Looking at the latest IMF numbers, the UK ranks 29 out of 192 countries and territories with a GDP per capita of US$56,471 estimated for this year. That is slightly below the European Union average GDP per capita of US$56,929. The average figure includes countries which until 30 years or so ago were under communism, with living standards that were far inferior to ours. The average American, by comparison, enjoys a GDP per capita of US$80,035 – so Americans are about 42 percent richer than Brits.

Back in 2000, UK GDP per capita was higher than that of 14 US states and similar to that of Ohio or South Carolina. Two decades later and the UK has a GDP per capita that is just below Arkansas. In fact, every one of the 50 states of the US now boasts a GDP per head superior to ours. Housing and energy costs are much cheaper in the US than in the UK and taxes are lower, thus the difference in disposable incomes is even greater than these GDP-per-capita figures suggest. That is why Americans are everyone’s favourite tourists – they’ve got more cash than anyone else and they splash it around.

It is true that the UK is richer than 163 countries and territories on the list, but the real point is that other comparable countries are faring better than we are. In particular, the US has been accelerating ahead of us in terms of living standards over the last decade or more. The US has also proved to be much more resilient in the face of the external shocks that have been manifest in the last 10 years or so – the financial crisis; the coronavirus pandemic with the disruption of global supply chains; the Russia-Ukraine war; and now inflation and the rapid reversion to historically “normal” levels of interest rates.

The National Health Service, which consumes about 44 percent of government expenditure – a figure likely to rise to 50 percent before 2030 – provides a health-care system which is markedly inferior to that which Americans rely on. There are currently over seven million people waiting for treatment in the UK, many of whom are unable to work because of poor health. And yet there is very little debate about how the NHS might be structurally reformed – the only acceptable political solution is always to spend more money on a failing system. In Europe public and private health-care providers happily coexist – yet such a policy is not even up for discussion here.

The one political leader who sought to prioritise growth with supply-side structural reform – Liz Truss – was driven from office after just 44 days as prime minister. This was partly because of her woeful inability to articulate her strategy and the adverse reaction of the markets to her chancellor’s “kamikaze” budget. But it was also because of the outrage of the civil service and the commentariat. Apparently, they could not countenance the resumption of fracking and new oil exploration in the North Sea. They did not want to lower taxes or to stop the persecution of the self-employed through the nebulous IR35 rules. They did not want to attract more top earners to the UK by abolishing the punitive higher rate of income tax.

This systemic inertia – a resistance to radical change – does not bode well for the future.

The Productivity Conundrum

At the beginning of this year the Chancellor of the Exchequer, Jeremy Hunt, hailed the statistic that UK output per hour worked – the standard OECD metric for productivity – had risen to 1.6 percent above pre-Covid levels. That is all very well but the UK still remains well down the productivity league when compared to other advanced nations. According to Our World in Data the UK languishes in 20^th place in terms of productivity, with output of US$54.35 per hour worked. That is significantly behind Germany (US$68.85) and France (US$68.63), not to mention the US (US$73.70). Thus, the Germans and the French are nearly 27 percent more productive than we are and the Americans surpass us by almost 36 percent. That is a huge differential which seems to be getting wider.

As we know, living standards in the UK have been falling and are on course this year for their biggest two-year fall since records began. This results from prices rising faster than wages. In addition, the total tax burden is due to hit a post-war high as allowances have been frozen and people are paying more income tax in real terms.

In addition, mortgage payers face higher monthly repayments as interest rates rise and their lending rates are refixed. It just so happens that the constituency of Selby and Ainsty in Yorkshire, where a by-election took place last week, has amongst the highest level of mortgage holders in the country, at around 36 percent of the population. The seat recorded a massive swing from the Conservatives to Labour. Clearly, the pain of mortgage holders will have huge political consequences. It has long been popular wisdom that homeowners tended to vote Conservative. That may no longer be the case.

The ability to increase the amount of output per hour worked determines how much the economy can grow without generating inflation. When productivity grows, so do company profits and labour wages. This leads to higher growth and thus a bigger economy, with rising tax revenues and hence healthier government finances. Therefore, the real focus of economic policy should be to boost productivity.

Why is labour productivity so much higher in the US than in the UK? There are many reasons and economists differ in determining which are the most important.

The first reason is that the American workforce is more mobile than the British workforce. It is common for Americans to seek work in a different state and to move their families hundreds if not thousands of miles across the country. Britons seem to be more loath to relocate. This may be partly due to social-housing policy. Once a family in a big expensive city like London gets the use of a council house, they tend to be very reluctant to surrender it and move elsewhere. Even if they decide to move, the question arises of whether there will be affordable housing available. Further, it is easier to hire and fire workers in the US – the two-week notice period is treated as a courtesy rather than a legal requirement – and therefore people expect to change jobs more frequently over the course of their careers.

Second, Americans work longer hours than Brits. You might even say they work harder. The average American works 1,811 hours per year, as compared with 1,532 hours for the average Brit. Americans take shorter holidays than Europeans. Two weeks off is considered a long vacation, stateside. Elon Musk’s “hardcore work culture” epitomises the American work ethic in which those who strive win big time. The British are, shall we say, more relaxed – although some would say that we have given more thought to the work-life balance.

Third, as I have discussed here before, the UK has a relatively large number of self-employed people and people who are working part-time, especially as compared to France and Germany. Some of the part-timers are caring for children or the elderly – a form of valuable activity which is not picked up in the economic statistics. True, in the US there is also a large ‘gig economy’ with people working as Uber or delivery drivers – and some of them do very well. I’m told that a dog walker in New York City can expect to earn around US$50,000 a year – though that is considered a modest income in the Big Apple.

During the pandemic, the US experienced a marked but temporary increase in unemployment. The UK, in contrast, experienced a contraction in the labour market as millions of people withdrew from the labour market altogether, largely on grounds of long-term sickness, sometimes mental health related. As a result, vacancies have soared.

Fourth, out-of-work Brits are more likely to seek benefits than a new job. Many apply for incapacity benefit, especially since in-person assessments (that is, interviews) were discontinued during the pandemic. The OBR reckons that if incapacity-benefit claims had remained at 2016-17 levels, there would be 670,000 fewer approved claimants than there are now. It is not at all clear that people on such benefits are taking their time out of the labour market to improve their skills.

Another reason for our lagging productivity – though something more difficult to quantify – is what the MIT economist Daron Acemoglu (the co-author of Why Nations Fail) calls the tolerance of mediocrity. Americans are perfectionists – which is why all the feedback platforms on social media like TripAdvisor are of American origin. The British, on the other hand, are used to putting up with (to use the technical term) Crap. The British tolerance of mediocracy manifests itself in a wholly inadequate train network which is subject to regular strikes (or even these days to “ASOS” – action short of a strike); and in motorways partially closed by a multiplicity of bollards. And in patients languishing on parked trolleys in hospital corridors.

Americans believe deep down that life can be improved through hard work and smart planning. Brits believe in muddling through. This cultural difference has economic consequences.

Economic Outlook

Inflation is still rampant in the UK – the figure for the end of June was 7.9 percent − and interest rates are likely to rise further, especially given rate hikes by both the Fed and the ECB this week. Growth is negligible.

And yet in an ONS survey out earlier this month, 36 percent of respondents thought that their business performance would improve over the next 12 months compared with nine percent who thought things would get worse. So, there are four times as many optimists as pessimists. There was also a modest uptick in manufacturing output and consumer confidence. There is still a reasonable chance that falling energy prices will bring inflation down to the prime minister’s target rate of four percent by the end of the year.

Another hopeful sign is that UK house prices, which the doomsayers foresaw would collapse this year, fell only very modestly last month and are still 2.6 percent above their January level, according to Rightmove.

The London equity markets compare unfavourably with those in New York. The FTSE-100 is still populated by mature companies in old-world sectors. While these companies are consistently cash-generative, they are not growing. A number of tech businesses such as Cambridge-headquartered chip maker ARM Holdings are choosing to list in New York.

The FTSE-100 closed at just over 7,000 on 31 December 1999. Yesterday, 23 and a half years later, it closed at 7,693. Admittedly, had you remained invested in this market you would have received a dividend income of around four percent a year – much more than the return on cash since the financial crisis of 2008. But the UK equity markets are fundamentally boring – which is one reason why even UK institutional investors such as Legal & General allocate just five percent or so of their portfolios to them.

At his white-tie Mansion House speech on 10 July, Hunt unveiled reforms to allow institutional investors to allocate equity finance to unlisted UK tech firms. The energetic Lord Mayor of London, Nicholas Lyons, has orchestrated an agreement between nine leading UK pension providers now labelled the “Mansion House Compact.” This determined that participants would funnel at least five percent of defined-contribution pension funds into illiquid investments in the years to come.

Will such measures stimulate our lagging productivity? In themselves, I doubt it.

Cultural Backdrop: Consequences Of The Tolerance Of Mediocrity

Quite apart from the economic statistics, recent events have been depressing for people who love this country.

The argument about Nigel Farage’s bank account reinforces the impression that the UK is no longer a democracy where free speech is prized. Should I be concerned that my bank, HSBC, might close my account in response to my lack of enthusiasm for the Chinese Communist Party, which I have expressed herein these pages?

The Archbishop of York – the number two in the Anglican Church – believes that the Lord’s Prayer is “problematic.” The BBC, which is funded by a poll tax which it vigorously defends, becomes more ‘progressive’ by the week. BBC Radio 4 obsesses about race and gender to the exclusion of almost everything else. Even the veteran broadcaster John Humphries thinks that Radio 4 has been “ruined.” Its flagship Today programme has lost 800,000 listeners in the last year.

The public standing of the Anglican Church, the BBC, the NHS and indeed the Bank of England are in freefall. All of these institutions have in fact become box-ticking bureaucracies peddling ‘woke thought’. Horrific miscarriages of justice erode the confidence we once had in our judicial system. Jury trials are to be abolished in Scotland for sex crimes − something that would have appalled the luminaries of the Scottish Enlightenment.

The notion of fair play, which people of my generation thought was fundamental to the British way of life, has almost vanished. (Even the MCC, it seems, no longer respects the legitimate decision of an umpire). The quality of the national discourse has coarsened. Even our famously bleak sense of humour, which has carried us through dismal weather and Nazi bombing raids, has been enfeebled by the fear of offending people.

The total value of state-pension liabilities for doctors, nurses, policemen, soldiers and the rest – all entirely unfunded and paid out of current spending − is now estimated to be in excess of our annual GDP and growing. That does not include the bill for the state-retirement pension which is guaranteed under the Tory government’s unbelievably generous “triple lock.” It is pretty much impossible that Gen-Z will have such generous pensions when they come to retire as the state will long since have gone bankrupt.

The Blair-Brown governments (1997-2010), then followed by the Coalition government (2010-15), refused to ramp up Britain’s nuclear-power production capacity with the result that we now face grave energy insecurity. Successive governments have failed to support our agricultural sector with the result that we now face food insecurity too. Comparison with our better-managed near neighbour, France, could not be starker.

Most depressingly of all, there is very little prospect that things are likely to get better in the foreseeable future. The Labour government that will probably come to power in the fourth quarter of next year will borrow more and tax more while tying us up with more fatuous climate targets and making it easier for unions to call their members out on strike. Scotland and Wales are likely to remain in thrall to monocultural political parties which strike progressive poses without taking responsibility for what they cost.

All this makes it difficult to persuade investors – even British ones – to invest in Britain.

A country with low productivity, negligible growth, persistently declining living standards, out-of-control immigration, a poor-quality national conversation, declining health and weak national governance will, at a certain point, reach a crisis point.

That will not be pleasant.