If Britain is to emerge stronger from Brexit, key reforms and overhauling of systems in seven major sectors should be a priority for the political class.
Brexit has been lauded by many across the political spectrum as an opportunity to ‘take back control’, to depart from the failing Eurozone economies and set out a new course for a modern economy driven solely by Britain.
The immediate impact of Brexit is likely to be negative, but it does open up policy space, if Britain seeks to depart from the EU competitions directive, to cut financial regulations, or to reduce workers rights and reduce European migration.
Politicians on the left and right of Britain are very much divided on the causes of the eurozone crisis, and the right course for Britain, but a strategy is emerging, that offers a real opportunity for Britain to emerge from Brexit a stronger country, and lays out a path for progress in the modern era that other countries can follow.
The immediate negative impact of Brexit is best understood in two parts.
A soft Brexit, in which Britain stays in the single market, or a hard Brexit in which we leave, is going to see an increase in tariffs on trade between Britain and the EU. This will result in a rise in the cost of EU goods, effectively reducing the value of the goods and services Britain produces. The Centre for Economic Performance at London School of Economics has predicted a soft brexit is likely to increase the cost of EU trade by 2%, causing a subsequent 1% fall in British GDP, while a hard Brexit will see costs of trade increase by 8%, and a 2% fall in GDP.
Following through from this, the second impact of Brexit will be a fall in private investment. As the cost of trade with the EU rises, the profitability of British business will fall. Some investors will choose to shift abroad to other countries, or to spend more on non-productive sectors of the British economy, like financial speculation, or share-buybacks.
The former is a problem that largely cannot be reversed. We can target investment into the worst impacted industries (Textiles, Electrical and optical Equipment, Chemical products, Mining), and the worst impacted regions (Aberdeen, the City of London, Tower Hamlets), but all this would be doing effectively is to distribute the harmful impacts of Brexit evenly. We will have to learn to live with the EU tariffs, and ideally in the long-run, find some way to bring the tariffs down, while maintaining our policy space.
The latter impact, that of a fall in private investment, can easily be mitigated with the right offsets from the public sector. Though the impacts of tariffs are significant, significant sections of the media and politicians fail to recognise the easy responses to a fall in private investment, and respond to scare-mongering about the impact of Brexit.
This is not overly surprising. Though the EU has some unique problems, most of it’s decline, and decline of the US, Australia, Canada and the Uk can be traced to the abandoning of the realities of public finance in the 70s, in favour of baseless myths and neoliberal ideology. The turn towards neoliberal economics across the western world is what Britain must reverse, especially if we are to emerge from Brexit a stronger nation
The basic premise underlying neoliberalism, that government spending is inefficient, and inflationary, has led to myriad attempts to drive western economies primarily through the private sector, with disastrous impacts. The norm has become low wage growth and low productivity growth. Attempts to alleviate this in the 90s with financial deregulation, and encouraging profligate borrowing resulted in the 2007 financial crash. Along with still stagnant wages and productivity, Britain now enjoys huge levels of household debts, declining public services, rising homelessness and sharp inequality. Perhaps the worst metric of our failure though is that five million people in Britain who want work, are unable to find it, and another one million have part-time jobs when they want to be fully employed. This represents a huge waste of labour power, that could be easily mitigated with sound policy.
The greatest myth of recent years that has blighted economics, is that of equating government finances and household budgeting. Politicians talk of treasury bonds as a perilous burden threatening the nation, of the inability to spend without harmful tax rises, and the threat of government bankruptcy. None of this matches reality. The British government, like that any developed country (outside of the Eurozone) has Monetary Sovereignty, meaning it can produce it’s own currency at any time, and can effectively never run out of money. The purpose of issuing treasury bonds and collecting taxes is not to finance government spending. The government does not keep the money that it collects in taxes, but rather destroys it, and creates new money when it spends on government programs. Rather the purpose of taxation and issuing treasury bonds is to reduce the money supply in the economy, in the hope of reducing the inflationary impact of government spending.
Likewise the government does not keep the money that it gets from issuing treasury bonds. Treasury bonds are issued primarily to banks, and their purpose is to reduce the excess cash in the banks, thereby reducing the amount of money in the economy, and hopefully reducing inflation. Since the government has monetary sovereignty it will always be capable of paying off its bonds, if it wishes, and so long as bonds are always issued to buy up excess cash in the banking system, they will always be cheap.
Talk of ‘balancing the books’ and bringing down the levels of ‘public debt’ are largely pointless, and serve little purpose beyond justifying ideological cuts to public services. The government should be focusing on public spending to achieve full employment. As noted earlier, the government does not need to tax or issue bonds in order to spend money, these measures exist to offset potential inflation.
The advance of neoliberalism has seen politicians talking as if any government spending that increases the money supply will be inflationary, but this claim is largely devoid of empirical evidence. Proponents of neoliberal economics talk fondly of the private sector investment but chastise public sector investment, but the reality underlying the rhetoric is that they simply wish to propagate myths about the inefficiency of government spending.
Economists largely understand that there is no simple relationship between new spending in an economy and inflation. Economists like Bill Mitchell and Randall Wray argue that the best way to measure whether there is room to increase spending in an economy is to look at unemployment levels. If there are significant unemployed people in a nation, then spending can be used to employ them, without need to worry about inflation.
With five million unemployed people in the UK, this means there is significant space for new money to be spent in the economy. The responsibility for this, however falls on the public sector. The government can and should be spending as much as is necessary to achieve full employment in Britain, bringing all the people of the country into productive action. If private investment rises in the future, the government can step back, and if private investment falls, the government can take a larger role, the priority being to maintain full employment, at all times. This does not need to be offset with tax increases, or issuing new treasury bonds, but can simply be new money, created and issued into the economy.
With this in mind, it is clear that there is no real need to worry about the fall in private investment resulting from Brexit. Concomitantly, the Conservative Party’s plans to cut workers rights, environmental rights, and taxes to spur private investment after Brexit, are entirely unnecessary. Rather, the government should be thinking strategically about where best to invest our money, what infrastructure we need, what skills, what technologies can be developed and planning ahead for how Britain can once again become an entrepreneurial state, driving an innovative modern economy.
Here I will expand on seven key areas for driving Britain’s industrial strategy;
1. Research and Development:
The state has a key role to play, not simply in supporting private research, but in taking risks themselves, to develop new markets, and push the economy in new directions. Britain currently spends around 1.7% of its GDP on research and development, and should look to increase that to around 3%, to get on par with leading nations like Germany, Japan and Switzerland.
In particular, Britain needs targeted research to develop its key high-tech industries, mainly Financial Services, Aerospace engineering and Pharmaceuticals. We should also invest heavily in automation, so that workers can be taken out of low-skilled work in services, transport, and manufacturing, retrained, and redeployed elsewhere. Furthermore, we should be looking at sustainable technologies; Britain could be a pioneer in sustainable aviation, and for our own economy, we’re going to need advances in wind power, and electricity storage which could be turned into export industries.
Key to this is an increase in public research funding, and the development of public/private partnerships between universities and business, so that research can be tailed to the needs of our economy.
Public education has been key to driving industrial society for nearly two-hundred years. As general levels of technology rise, work becomes increasingly more sophisticated. Workers need much higher levels of specialised education than they did fifty years ago, and higher levels of general education to help them switch careers when a job becomes redundant. With rapidly increasingly technological development, and the spectre of automation on the horizon, workers are likely in the future to change careers much more often in the future, making adult education a key priority for a modern economy. We would also benefit from further investment in well-paid apprenticeships, and support for students to pursue bachelor and master’s degrees.
Britain therefore urgently needs a National Education Service, to cohesively bring together all of the adult education opportunities in the UK, to develop and expand these opportunities, and tie them into the existing education structure. At the same time, Britain is failing our youngest children, with appropriate childcare being unavailable for many of our poorest families, and primary schools classes frequently being too big for effective teaching.
A comprehensive strategy to overhaul education is necessary and Britain should look to raise its education spending from 5.8% of GDP to around 8%, bringing it up to the highest international standards.
The key infrastructure priorities for Britain are transport, energy and internet coverage.
Internet coverage is particularly important for Britain as a modern economy relying on financial services. The government should look to expand its partnership with BT’s Openreach, financing the deployment of high-tech fibre optics to the whole of the country. One of the industries worse hit by Brexit will be electrical and optical engineering, so this area in particular will need investment, and there should be strong encouragement for renewed partnership between public researchers and business leaders.
For transport strategy it is essential that Britain nationalises it’s rail services. The experiment of privatisation of the railways in Britain has been a disaster, with prices for customers among the worst in Europe. The government should look to nationalise rail services, and run them as non-profit enterprises, bringing down costs for the customer as far as possible. The controversial HS2 proposal should be supported; albeit with much better environmental protections; along with a sharp increase in investment in transport infrastructure in northern England, Scotland, Ireland and Wales.
Regarding its energy strategy, it is long overdue that Britain recognises the urgency of climate change, and effect a rapid transition to green energy. Shale gas must be abandoned immediately, and finance provided for the rapid construction of renewable energy. In the UK, wind turbines may prove to be the cheapest source, followed shortly by solar energy. Britain will need to drastically bring down its energy consumption, with rapid electrification of our transport systems, insulation of homes, and the installation of smart meters to help businesses monitor their energy. In the medium term,Britain will need to deal with the intermittency problems inherent in renewable energy with battery technologies, in which investment must be promptly begun.
Beyond energy concerns, Britain faces a troubling array of environmental issues bound up with its food porduction to cope with each of which will require careful action.
Modern agriculture faces three major, overlapping problems; Firstly, large quantities of phosphorus and nitrogen, used as fertilisers, are leaking into our water supplies and causing huge damage to our marine ecosystems; Secondly the loss of significant quantities of topsoil every year to erosion is reducing crop yield; Thirdly, the high cost of farmland is encroaching on valuable British ecosystems.
The former two problems can partially be addressed with better education, and investment in new sustainable techniques. That will not however be enough, and with global populations expected to rise rapidly, we need more drastic measures to ensure sustainability into the long term. What is urgently needed, however, is a change in British diet. A significant reduction in the consumption of meat and dairy, foods that are land-intensive, would see the demand for land fall by as much as two-thirds, freeing up space for less-intensive and more sustainable farming methods, and for regenerating valuable ecosystems and forests. Dairy and beef also key sources of methane, a major greenhouse gas as is well known so reducing them is vital for addressing climate change.
Our fish stocks, many of which we share with European nations are at risk of serious decline. We can invest in more sustainable aquacultural techniques, but likely we will need to cut back. Investment will need to be targeted at coastal communities, both to help them develop more sustainable fishing operations, and to provide new jobs for those who suffer as the sector shrinks.
Beyond Farming and Fishing, many of the natural resources that our economy relies on, are due to peak in the coming decades; including Nickel, Copper, Zinc, Helium, Lead, Gold and Tin. Continuing to use these resources as we are at an exponential rate of growth, will soon become practically impossible, and we will need to reorganise our economy to maximise recycling of finite resources as much as possible. Economists and politicians are beginning of talk of a new economic model, known as the Circular Economy. Britain must take the initiative now; demonstrating the possibilities for sustainable resource use in the public sector, developing educational resources for the private sector, and bringing in regulations to drive the market forwards in this new direction.
The slew of recommendations outlined above with regard to investment in research, education and infrastructure should see unemployment fall significantly – employing people to do the work, will result in a subsequent rise in British productivity, opening up new opportunities for private investors.
For those still unemployed after these measures, the government should look to the successes of Job Guarantee Schemes, and the government’s important role as an employer of last resort. A basic outline of the Job Guarantee scheme would be a government financed scheme, providing work for everyone who has been unemployed and unable to find work for a reasonable period of time. Workers would be making the minimum wage, and given enough hours to provide a reasonable standard of living. The program would be financed by the state, and administered in a decentralised fashion, by local government and non-profits. Such a scheme would have four obvious benefits;
Firstly, local communities and nonprofits would benefit from an influx of workers, available to improve and develop their local area
Secondly, with a Job Guarantee scheme, no-one need suffer long-term unemployment. Long-term unemployment has a myriad of documented effects, including loss of work ethic, loss of skills and mental and physical health problems, all of which add costs to the State and to society. A job guarantee would keep the unemployed productive, and reduce such costs.
Thirdly, a job guarantee, integrated with the national education service, would provide a vital opportunity for on the job training and thereby make them much more attractive to private employers. Many people have difficulty with lecture style training, with on the job training being much more effective and such a scheme would provide that.
The last benefit of a Job Guarantee is it’s counter-cyclical nature. Normally when private sector investment falls, people lose their jobs, resulting in a fall in demand in the economy, when can further hurt investment, resulting in a vicious cycle of decline. The nature of the Job Guarantee would be such that people who lose their jobs would have another job to fall back on, cushioning the blow, and maintaining demand in the economy, to prevent spiralling recessions. The Job guarantee could thus automatically expand in response to falls in private sector investor, or shrink when the private sector is booming, helping the economy to stay more stable.
In the neoliberal era, efforts to increase the profits of private investors, and attract them to britain, has meant a growing disparity between the rich and poor. In recent years this has provoked much moral outrage, but it is should also be of concern to economic strategists, given the impact of inequality on our culture and society. Comparisons of inequality in developed countries have already shown that that inequality is closely correlated with higher levels of mental and physical health problems, poorer results in education, worse social mobility, and lowers levels of trust and charity work. Bringing down inequality is thus critical for helping our citizens be more productive and fruitful.
At the moment in the UK the top 20% of society earns roughly seven times more than the bottom 20%. It is imperative that the multiple be brought down to at least four times, such as in countries like Japan, Sweden and Germany. How might this be achieved? Two suggestions come to mind.
One way is by introducing a higher progressive income tax rates, of 50%, 60% and 70%, increasing the tax burdens on the richest people in society and also by increasing the minimum wage. If coupled with the Job Guarantee scheme, there need be little concern that the minimum wage will result in loss of jobs, and it may in fact fuel competition Businesses would necessarily have to provide a higher wage or better working conditions, to win over employees. Britain should look to raising its minimum wage to £10/hour by 2022, with an eye to further advances as productivity rises.
Beyond that, a land value tax could provide a new measure to reduce inequality. Supported by Joseph Stiglitz, and similar to Thomas Piketty’s wealth tax, a land value tax would be based on the undeveloped value of all land in the UK, encouraging landowners to develop their land, discouraging land hoarding, and helping redistribution efforts from the rich to the poor.
7. Management of Capital:
As a final measure, it is worth looking into the alternative ways of organising capitalist enterprises. The German model of workers-representation on corporate boards, provide a valuable mechanism for workers to negotiate with managers in the workplace, and avoid industrial disputes, a model that could be easily replicated. Employee-owned businesses like John Lewis provide extensive in-house training, while Worker Coops, and Mutuals are often more productive than their counterparts, and invest more into their local communities. Both of these offer viable alternatives to the current top-down structure of capital holding.
The government could encourage COOPs (Cooperatives) and Mutuals, which frequently have trouble accessing capital from investors, with finance from new public investment banks, and with legislation to give employees a ‘right to own’, giving workers facing a change of ownership or closure of a firm, the first chance in putting together a worker-owned alternative.