Tumbling UK investment is preventing long-term growth
- Entrepreneur and economist John Mills sets out radical new manifesto for long-term prosperity
- Investment must rise by more than half for Britain to compete in world economy
- Renaissance in manufacturing needed to reverse spiralling trade and budget deficits
Investment will need to rise dramatically in the coming years if Britain is to achieve long-term sustainable economic growth, the entrepreneur and economist John Mills says in a new Civitas pamphlet.
The proportion of national income invested back into fixed assets has fallen significantly in recent years and is now little more than half the world average, he warns.
Setting out a radical new manifesto for growth, Mills says a central objective must be rapdily to increase gross investment from its current rate of 13.5% to well in excess of 20%. The world average is about 23%, while in China it is 46.1%.
In There Is An Alternative: An economic strategy for 2015, he calls for an end to the short-termist consensus that has dominated Treasury thinking and has saddled the UK with an economy which consumes too much, invests too little and cannot pay its way in the world.
He advocates devaluing the pound to boost exports and spark a renaissance in manufacturing. In detailed calculations, Mills shows how the UK could achieve sustainable economic growth of 4% to 5% a year and gross investment could rise to about 23%.
“This is essential if the economy is to embark on sustained growth path,” he writes. “A crucial requirement for getting the UK economy to grow much more rapidly on a sustainable basis would be to get gross investment as a percentage of GDP up to a much higher level than it is at present.”
But he warns that gross investment has been on a downward trajectory in recent years and international comparisons are even worse when depreciation is taken into account.
Of the £224bn gross investment in the UK in 2012, £176bn – almost 80% of the total was offset by capital consumption, or depreciation to allow for expenditure on keeping existing assets from deteriorating, leaving only £48bn – 3% of GDP – as net new investment.
He adds: “In China the ratio is about 10 times as much. No wonder that their economy keeps growing at nearly 10% per annum while ours stagnates.”
Mills points out that the value of investment varies enormously in terms of the resulting impact on wages, profits, tax receipts and better quality goods and services. The return on infrastructure projects can be relatively low while investments with a short gestation can produce cumulatively much better returns.
“A crucially important policy requirement is therefore to bias, as far as possible, gross investment into projects which have both a high social rate of return and short gestation periods, while at the same time keeping a reasonable balance between public and private investment, both of which will be needed for balanced growth,” he writes.
He argues that achieving growth of about 5% would also remove the need to eliminate the budget deficit, as the three main parties plan to do within the next parliament. Instead it should be allowed to run at 2% or 3% of GDP, he argues.
“If the economy were growing consistently at 5% per annum, both a government deficit and a foreign payments deficit of, say, 4% of GDP would be sustainable.
“To proceed with a margin of safety, it may not be prudent to push matters to the limit like this. It would, however, be possible to continue with both government and foreign payment deficits of perhaps 2% or 3%, or to have higher percentages on what was clearly going to be only a temporary basis. This provides a very substantial element of flexibility.
“The objective, therefore, should not necessarily be to reduce or to eliminate either of these deficits but only to ensure that as a percentage of GDP they both become lower than the growth rate.”
Mills models a scenario in which the value of sterling falls from $1.60 to $1.10, although how much lower the exchange rate would need to go would depend on how price-sensitive overseas demand proves to be and how quickly domestic production responds to higher import prices.
In order to spark a renaissance in manufacturing, he also envisages efforts to retrain workers, develop new production facilities, speed up planning permission and install better infrastructure such as roads, rail and high speed internet. Finance would also need to be redirected towards commercial investment in plants, machinery and working capital.
Mills argues that Britain’s trade imbalance and foreign payments deficit is putting the government’s debt-reduction strategy at risk and could snuff out the current modest economic growth. If Mills is correct in his analysis, the prospects for the UK economy potentially are hugely better than those likely to result from current policies.
There Is An Alternative: An economic strategy for 2015 is published today by Civitas: Institute for the Study of Civil Society. A PDF can be accessed below. Hard copies are available on request.
John Mills is an entrepreneur and economist. He graduated in Philosophy, Politics and Economics from Merton College, Oxford, in 1961. He is currently chairman of John Mills Limited (JML), a highly successful import-export and distribution company. He has been Secretary of the Labour Euro-Safeguards Campaign since 1975 and the Labour Economic Policy Group since 1985. He has also been a committee member of the Economic Research Council since 1997 and is now Vice-Chairman. He is also Co-Chairman of Business for Britain. His previous Civitas publications include A Price That Matters (April 2012), An Exchange Rate Target: Why we need one (April 2013) and A Competitive Pound for a Stronger Economy(October 2013).
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There Is An Alternative: An economic strategy for 2015