Sunday, March 13, 2005
Britain weighed down in the race with the new giants
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

HERE is an interesting trivia question. Were more manufacturing jobs lost under John Major or Tony Blair? The answer is Blair: one million in under eight years, compared with just over 500,000 in Major’s six-and-a-half years at No10.

Here’s another. Just how much of the rise in employment under Labour has been accounted for by public-sector jobs? One proxy for state jobs is employment in public administration, health and education, which has gone up by 927,000 since May 1997, out of a total rise in employment of 1.97m. Roughly half the new jobs, in other words, have been in the public sector.

Is public-sector employment at a record? On this measure, certainly; there are 2m more people employed than in the late 1970s, when records began. The Office for National Statistics uses a slightly different measure, which suggests that, even leaving out nationalised industries (which used to employ more than 2m but now account for fewer than 400,000), government employment was slightly higher in the early 1990s, before falling sharply under the Tories.

Even so, the trends are unmistakable. Figures on Friday showed that public-sector employment, on the ONS’s definition, fell by 815,000 between 1991 and 1998, but rose by 583,000 between then and the first quarter of last year. It is still rising strongly in spite of the chancellor’s promised civil-service cutbacks. The NHS now has 1.4m people on the payroll, 5% of the employed workforce, a near-doubling over 30 years.

I raise all this now because we will hear a lot from Gordon Brown on Wednesday about the need for Britain to be a highly competitive, enterprise-friendly, skills-rich, well-educated, science-and-technology-based economy. The list of ambitions the chancellor sets out will be as long as your arm, as he details how Britain can and will respond to the challenge from China and India.

But does this emperor have any clothes? The EEF, the Engineering Employers’ Federation, has been counting down the clock to the point where 1m manufacturing jobs will have been lost since Labour took office. It should come with the release of figures on Wednesday morning, just as Brown will be doing his voice exercises in preparation for his midday budget speech.

It is a long time, admittedly, since Britain’s prosperity was measured in terms of the number of manufacturing employees, which has fallen by 60% since the peak of the early 1970s. But what has happened to what many people still regard as the truly productive sector of the economy has echoes elsewhere.

Take, for example, Britain’s overseas trade, revealed last week to have been in deficit by £5.2 billion for goods, or £3.7 billion for goods and services, in January.

Last year the trade deficit in goods was a whopping £57.9 billion, nearly five times the £12.3 billion figure Brown inherited in 1997. The deficit in goods and services was £39.7 billion. That broader definition of the trade gap was actually in surplus, by £1 billion, in 1997.

There are several explanations for this deterioration, one of which would relate to the strong growth in consumer spending in Britain in recent years, particularly in comparison with sluggish domestic demand in Europe. But that takes us only part of the way, and it is hard to argue that Britain has become more competitive when faced with a yawning trade gap that the official statisticians say is becoming ever larger.

Britain’s productivity (output per worker) is 11% below the Group of Seven average and significantly behind America and France. The gap is even greater in output per hour.

It has narrowed in relation to Germany, but that largely reflects that country’s poor performance. Even the Treasury, when it last reviewed the evidence in December, conceded that “a significant gap” remained between Britain and its best-performing advanced competitors.

In skills, one of the keys to Britain’s long-term ability to compete, we start at a disadvantage. A recent study sponsored by the Department for Education and Skills found that the UK had a lower proportion of the workforce with level 2 skills (A-level or vocational equivalent) and above than America, France, Germany and Singapore, the four other countries studied. The Treasury and Department of Trade and Industry note a lower proportion of the workforce with intermediate skills, and a higher proportion with low skills, than other countries.

Tie that to recent Ofsted evidence that more schools are blighted by unruly and disruptive behaviour, and a disturbing picture emerges. We are turning out too many unqualified school-leavers, often with attitude problems to match. They used to be called factory fodder. These days, however, we do not have the factories for them to work in.

It is not all gloom. Although gradually eroded by the re-regulation of the economy under this government, Britain still has flexibility advantages over the other big EU countries and lesser economic problems. But competing with Europe is no longer where the main battle lies.

The issue is whether we are moving in the right direction. The big rise in public-sector employment and the accompanying increase in taxation suggests not. The more that taxes go up, the more incentives suffer. Last week the Organisation for Economic Co-operation and Development (OECD) suggested that a married man with children on average earnings faces a marginal tax rate of 70% as a result of the loss of tax credits (a figure hotly disputed by the Treasury). High tax, wherever it hits, is a gift to China and India.

Brown, in focusing his attention this week on whether Britain is doing the right things to be able to compete with these new economic giants, is asking the right question. But the government often comes up with the wrong answers. Are we getting more competitive? Not yet.

PS: The International Monetary Fund (IMF) published its country report on the Socialist People’s Libyan Arab Jamahiriya (Libya to you and me) a couple of days after releasing a similar exercise on Britain. They follow similar lines, though the IMF regards Libya’s fiscal position as “comfortable” while it says Britain needs to raise taxes or cut spending by £12 billion or so.

Interestingly, the IMF also notes from its talks with the Bank of England that recent big budget deficits have put upward pressure on interest rates, although at 4.75% the rate is close to “neutral” and the next move could be up or down. Last week the Bank sensibly left well alone.

The euphoria over strong January corporate-tax revenues may have been overdone. The budgetary problem looks less severe than it did but it still exists. The likelihood remains that the chancellor’s golden rule will be broken. Lombard Street Research suggests immediate post-election tax hikes of £10.5 billion will be needed.

Grant Thornton takes a stab at guessing where the extra revenue might come from: not from higher tax rates, because that would be breaking election promises, but from “fiscal drag” — extracting higher revenue from people by not raising tax allowances, or by increasing them only modestly, so the number of higher-rate taxpayers, for example, will go up from 3.3m to 4m over the next parliament.

Halifax, in another report, has similar ideas on inheritance tax, which is on course for a doubling of revenues since 1997, and will continue to rise strongly as a result of more estates being dragged into it.

The Treasury has been grinding down expectations of tax cuts in this week’s budget. So it should be. Outside the Treasury the majority view is that only the election is stopping taxes from going up this time.

From The Sunday Times, March 13 2005

Comments

This article is an excellent wake-up call, but I think 0.25% on interest rates would have woken more of those sleep-walking into debt.

Still, pity the consumers - if interest rate rises don’t get them then tax rises will.

But I don’t think they’ll take it lying down, not at the beginning at least. Starting from a situation of full employment those that can strike for more pay will strike. Then the blame game between Treasury and BoE could become very nasty. (Just like Australia).

But that’s all ahead of us – first, Gordon’s big day.

Posted by: David Sandiford at March 13, 2005 11:52 AM

On the Today programme this morning, Gordon mentioned the £5bn (his figure) that is being saved through reductions in unemployment each year. By how much has the Incapacity Benefit bill gone up each year? My understanding was that the overall economically inactive is still about 3m.

Posted by: Snafu at March 17, 2005 10:22 PM

Snafu,

Don't make the mistake of thinking that all the "economically inactive" are on invalidity benefit. Many aren't counted as either unemployed or incapacitated. If you have savings and your other half works, you will normally get precisiely nothing in benefits, hence people don't bother to sign on.

Posted by: HJ at March 17, 2005 10:54 PM

HJ, thanks for the correction. I suspect my terminology was not totally correct. My understanding is that if you add the number of people receiving Incapacity Benefit to the unemployment claimant figure, the overall total has remained stubbornly high at 3m for a number of years.

Posted by: Snafu at March 18, 2005 10:51 AM

Just to clarify: There are about 2.7m people on incapacity benefit, out of 7.8m people of working age who are economically inactive. The 2.7m figure has been pretty steady since 1997 but the 7.8m number is close to a record. Some of that is due to increased numbers of students but some undoubtedly reflects disguised unemployment. I also think that part of the rise is self-employment is involuntary - people being made redundant and having to set up on their own, not always successfully.

Posted by: David Smith at March 18, 2005 11:31 AM

Estimates of use are readily available from the Labour Force Survey. I sourced this from NOMIS/ONS. I could look at the time series since 1992 but since its Thursday, before the easter bank holiday weekend and its 5.30pm its time I went home and cooked dinner for the wife.

What is interesting is the vast number of inactive working age people who do not want a job (nearly 6m). There is detailed information from the LFS on their socio-economic characteristics - i.e. whether they have a disability, or are early retired, or are students etc. I will dig this out and post it next week.

No. who are economically inactive - working age: 7,947,000
No. of working age economically inactive who want a job: 2,058,000
No. of working age economically inactive who do not want a job: 5,889,000
No. work age econ inactive, want job, reason not looking - discouraged worker: 36,000
No. work age econ inactive, want job, reason not looking - long-term sick: 640,000
No. work age econ inactive, want job, reason not looking - look after family/home: 548,000
No. work age econ inactive, want job, reason not looking - student: 243,000
No. work age econ inactive, want job, reason not looking - other: 390,000

Posted by: Glenn Athey at March 24, 2005 05:25 PM
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