Big problems holding back the UK economy – BBC News

  • Written by Faisal Islam
  • economics editor

image source, Getty Images

The economic shock from the pandemic and the war in Ukraine appear to have finally subsided.

Inflation has fallen for the third month in a row, and wages are now roughly in line with the pace of price increases.

Interest rates, which have been rising since the second half of 2021 and have made life difficult for struggling households and families alike, were finally suspended earlier this month, with Bank of England governor Andrew Bailey saying there were no signs that interest rate rises were starting to come under control. Inflation in the UK said to be increasing.

And even in the most challenging of circumstances, with three Prime Ministers in one year and a global pandemic, the UK economy has shown greater resilience than expected and has managed to avoid recession.

The economy is not completely free from the crisis that has been relentless for the past three years, but a path out of the crisis could be clear once the job market and oil prices calm down.

But once the storm subsides, deeper challenges will become apparent. The future of our economy and prosperity depends on investment spending. The UK is facing an underinvestment crisis, affecting both the private and public sectors.

There are no flying cars yet

A recent visit to Milton Keynes in southern England is one of the best places to see all the challenges and opportunities of Britain’s poor record in long-term investment.

This 1960s city is a place where long-term economic growth occurs. The original “new town” created to house baby boomer Londoners, the city is now embedded in a future of high technology and high investment growth.

200 shopping cart-sized robots will roam the lush bike path, delivering groceries, parcels, and fast food. You can call a rental car and have it drive to your location.

There are no flying cars yet, but the city council and local hospitals are trialling the delivery of medicines by drone. It may sound like an episode of the futuristic 1960s American cartoon The Jetsons, but parts of the city feel dated.

Local residents are upset that the city is being called a “concrete jungle”. There is a lot of greenery, and some of the concrete from the 1960s and 1970s remains. But some of what was new and shiny then, now, half a century later, is in need of funding to renew and rebuild, both in this city and across the country.

image source, Getty Images

image caption,

Britain lags behind other large economies in the use of robots

Here, Swedish-Swiss manufacturing company ABB trains advanced industrial robots that can work alongside humans, including picking, packing, sorting and welding. Dermot Lynch, the company’s managing director, says investment has been slow.

The UK is at the bottom of the Group of Seven (G7), which includes Canada, France, Germany, Italy, Japan and the US, when it comes to the adoption of robotics technology, according to the latest figures.

Lynch says the key is to bring these technologies, already widely used in car factories, to small and medium-sized enterprises (SMEs). “Robots code themselves by recording the movements of human operators. This may be especially important in small and medium-sized enterprises where technical skills are less strong.”

productivity puzzle

British companies are also not currently investing as much as other major economies. Britain was second in the G7 in terms of private investment as a share of the economy in the mid-1990s, but now lags behind them all.

The long-term effect of this is reduced productivity. We produce less and take longer than our competitors. The result is low growth, low real wages, and problems financing public services.

There is hope that robotics and artificial intelligence could become the technologies that solve the productivity puzzle.

For Treasurer Jeremy Hunt, fixing poor business investment is the main objective of next month’s Autumn Statement. A variety of tax changes have been tried, including “super-deductible” tax breaks that would give companies that invest in certain types of equipment, such as machinery, a larger-than-usual tax break.

This spring, Mr Hunt announced a new system that would allow businesses to fully deduct every pound they invest in IT equipment, plant and machinery from their taxable profits. The “full capital expenditure” policy allows companies to deduct investment expenditures from their profits for three years, reducing the amount they pay in corporate tax.

However, productivity problems remain deep-rooted.

Another aim of the Prime Minister in his autumn statement was a promise to balance borrowing.

“The Decline of the Public Sphere”

This is putting pressure on public spending, as reflected in the recent debate over the future of the HS2 rail link due to rising project costs. Capital investment in transport is set to increase significantly thanks to HS2, although there has been little increase for schools.

The principal of Milton Keynes Secondary School showed me what she called one of the worst examples of the school’s concrete crisis. It was an RAAC concrete gymnasium with a curved roof, built in the early 1990s.

This has led to criticism of the “decline of the public sphere” and the soundness of the overall structure of public services.

Public investment has slumped in recent years and was cut as part of the Coalition government’s austerity drive after the financial crisis. Ahead of the last general election, former Prime Minister Boris Johnson pushed to raise this to 3%, the long-term average of the size of the national economy.

But the current plan is to reduce that amount from next year onwards due to a cash freeze introduced to calm markets following last year’s turbulent mini-budget. Over the next four years, net public investment will decrease from his 2.9% of national income to 2.1%.

The reduction in investment also jeopardizes the UK’s commitment to reach net zero by 2050 and halt the rise in the amount of greenhouse gases in the atmosphere.

The city will benefit from a new £760m east-west rail link linking it with Oxford. The plan is to spend billions more on further connections to Cambridge. This will provide a major boost to growth by directly connecting his two world-leading research centers to a city with space and housing to grow. However, with capital spending under pressure, all major transportation projects are now being carefully scrutinized.

The government’s plan appears to be to leave the heavy lifting of investing in the future of the economy to the private sector. There are exciting opportunities in Milton Keynes and the rest of the world that could help break our poor productivity record. Converting this round is essential for long-term growth. However, this is extremely difficult to do when public investment is under pressure.

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