On the day that former Royal Bank of Scotland boss Fred Goodwin escaped explaining in court how he crashed the business and lost billions of pounds during the 2008 financial crash, it is timely to consider Britain’s post-election economic fortunes. It is a future still defined by the banking crash that Fred “the Shred” Goodwin was so much a part of, and by the aftershocks that still weigh the government down with debt. In particular, the blow to confidence deterred businesses from making the kinds of investments needed to raise productivity and lift average wages. Britain’s not a strong and stable economy, but a fundamentally weak and enfeebled one, brought low by a banking industry that lent hundreds of billions more than it should have to people it barely knew.
It is not for the want of profits that businesses have shied away from shopping for the latest ideas or buying the latest kit. Official figures show corporate profits last year were back to the peak achieved in 2008. In the last quarter, the number of companies convinced their profit forecasts were on target or likely to exceed expectations was at a three-year high. Yet in the three months before Christmas, business investment actually fell 0.9% and was flat overall during the previous year.
It is this lack of investment that the next government must address and quickly – not just to strengthen an economy starved of private sector spending since the noughties, but also to address the concerns of a younger generation that lacks an endowment worthy of the name from those already retired or reaching the end of their working lives.
This is not a subject that has featured much in the last few weeks of election debates and speeches. Questions about how to run the state and the economy while at the same time breaking away from the European Union have rarely been asked. Looking at the main parties’ manifestos, there is a clear divide between them, as there is on much else, even if there is some agreement on the need for greater state intervention. Labour believes corporate leaders had their chance to invest and blew it. Under Labour, government-backed investments will be the priority via a dedicated bank, public sector housing developments and some expensive nationalisations. Corporate profits will be returned to 2010 levels to fund it. The Conservatives expect lower corporation tax rates to finally trigger an increase in investment, and economic growth strong enough to offset the party’s painful austerity agenda. Theresa May promises more spending from Whitehall on infrastructure, but her policies continue to rely on the private sector to boost the economy.
This strategy might have some foundation, except that the decline in corporate taxes from 28% in 2010 to 19% this year produced virtually no increase in investment or productivity. Instead profits have found their way back to shareholders. Another cut in corporation tax to 17%, the Tories’ plan, means more of the same. Meanwhile, Mrs May plans to focus her austerity cuts on young people likely to have or to be planning a family, as the Resolution Foundation has said. Increases in personal taxes or VAT, which she has refused to rule out, would fall on the same group. Mrs May’s only stab at addressing the intergenerational divide was a tax on those who need social care. It addresses one small corner of the welfare state while the engine of employment and higher wages, namely the economy, continues to splutter. The new £3bn apprenticeship levy should be a bonus, but reports already indicate it that is being introduced haphazardly. Further education colleges and schools budgets are squeezed.
Labour is right. Only a bigger injection of investment funds from the state can lay the groundwork for higher levels of investment. And that is even more the case as Brexit negotiations loom. Anything less will mean Britain continues to rely on cheap labour and more debt to keep the show on the road.