UK Economy: Growth, Inflation and Productivity Debate

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Department: HM Treasury

UK Economy: Growth, Inflation and Productivity

Lord Desai Excerpts
Thursday 29th June 2023

(10 months, 3 weeks ago)

Lords Chamber
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Lord Desai Portrait Lord Desai (CB)
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My Lords, I thank my friend, the noble Lord, Lord Eatwell, for introducing this debate. I recall that in June 2022—almost exactly a year ago—we had a similar debate on this question. My friend, the noble Lord, Lord Griffiths, was also there. I said then that we were about to enter an era of stagflation. My idea was that we are going through a repetition of what the British economy went through between 1970 and 1990; I think the noble Lord, Lord Griffiths, made reference to that.

I think we are in a very bad situation and likely to remain so for another 10 years or so, I am sorry to say. Although we are not in recession yet, we are going to be in a recession because, as some noble Lords have said, the Bank of England is failing right now to tackle inflation. It has lost the habit of tackling inflation because, between 2000 and 2020, we had such low rates of inflation that central banks around the world attempted to increase the rate of inflation slightly, to get nearer their target rate. It sounds cruel to say it, but the rate that the Bank of England has fixed right now is not enough to tackle this inflation. I am sorry to say that. I think we are going to get a recession, and it is very hard to say when we will get out of it.

I am now old enough to have cranky views. I believe in something called Kondratiev cycles of 50 years, and I think we are now going to a new phase of a Kondratiev cycle, between 2020 and 2070, as we went through between 1970 and 2020. I am not just making this up. The problem with the British economy is that we deliberately deindustrialised in the 1970s and 1980s as a way of tackling inflation. I cannot give the numbers, but for example the share of industrial trade unionists in the total membership of trade unions was much higher than it is now. We have become a service economy, but our services sector is not as productive as it used to be.

If we look at other economies which are relatively industrialised, such as the US, the US transited to a very productive service sector economy, with digitisation and all that, much faster than we did. We tried to substitute our financial sector for our industries, and our financial sector right now is going through a recession. The City of London is losing business both to the US and to the EU. We have to think of this issue in a slightly longer view than we have been thinking. My guess is that, given where we are in this cycle, if we are going to invest, we will have to invest in higher education, research, fintech, AI and things like that, because that is the only way we will grow.

We are not going to re-establish a steel industry, a car industry or anything like that: those things have gone to Asia. They went to Asia during the 1970 to 1990 cycle. Indeed, very few people know that we conquered inflation not so much by central banks being very efficient, but by our losing industry and that industry moving to the low-tax, low-wage region of Asia. Our imports became cheaper and therefore inflation went down. All the central bank chiefs claim credit for that, but I think it had nothing whatever to do with central banks; it was the transformation of the economy. Basically, the capitalists decided to abandon the West and went to Asia, and that brought inflation down.

We have not actually understood that process: we still think that we are in the old world and we still talk in terms of productivity growth. Productivity growth is very much more difficult to measure or to target in a service industry. One thing we ought to do, if nothing else, is have a commission, or some such thing, to re-examine the notion of productivity. Productivity is a very different thing in a service economy.

Finally, we need a thorough reform of our education system, so that more of our young people get a proper education, including higher education, and can then contribute properly to the service economy.