Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
The time is coming when Britain will yet again need to learn to live within our means. Eight years after the financial crash the Government is still borrowing £50 billlion per annum, and we continue to run an annual current account deficit of £40 billion – two per cent of Gross National Product.
The Office for Budget Responsibility forecasts a further £122 billion of borrowing over the next five years – potentially increased significantly by EU payments.
Thirty-two million people in employment (up 2.7 million since 2010) is further evidence that we’re enjoying “peak times” and is a positive achievement – this is not ‘austerity’. But this could not have been achieved without substantial immigrant European labour, and the output per person employed (productivity) has not increased.
Jeremy Corbyn and his followers are misleading young people irresponsibly. There is no way he could deliver his spending promises, costing an extra £150 billion of borrowing. Indeed he would likely find it difficult to finance existing government borrowing. The “magic money tree” would be about ‘printing’ the money, and starting down a road leading to runaway inflation.
It was also disappointing that the Conservative manifesto began with an unjustified attack on business. Britain needs a business- and entrepreneur-friendly government to deliver the investment and the confidence needed for higher investment and improved productivity.
Our poor productivity performance is the critical problem. As a result of it, pay has not risen in real terms. For the lower paid, ‘take home’ has improved as a result of raising the level of income at which income tax is paid. But for the majority, there has been little or no increase in real pay for several years, and this is being diagnosed wrongly as “austerity”.
People need to understand that better real pay needs higher output per employee; increased pay without increased output simply leads to rising inflation. There are two key factors which increase productivity; the first is a significant increase in capital investment and the second is more efficient use of employees.
The UK, particularly the southern half of the country, needs major road infrastructure investment. Many businesses could also increase their investment where they need the confidence so to do.
An important factor restraining capital investment is relatively cheap UK labour costs. As Alistair Darling, the former Labour Chancellor, has conceded, Labour’s tax credits, intended to raise living standards, have largely had the effect of reducing pay. Why should the employer increase pay when the Government will pay up?
With labour relatively cheap to the employer, many businesses have more staff than they really need, and as an alternative to capital investment. It is interesting to note that poor British productivity has coincided with the introduction of tax credits: when we finally got back to pre-crash GDP in 2015/16, it was with some two million more in employment – productivity had fallen.
Here, there is a strong case for a significantly higher minimum wage, which should have the by-product effect of increasing productivity. Businesses will not employ more people than they need and will look at investment as an alternative.
There is the need for substantial infrastructure investment in the UK, although I am leery of leaving decisions to government, where both HS2 and Hinkley Point look like bad value. Might it make sense to have a Standing Committee of senior businessmen to review and work up infrastructure investment proposals, ones which look to be readily financeable by overseas investors?
Thankfully, we remain an attractive economy for entrepreneurs and overseas investment, but we need to resist misconceived tax increases on entrepreneurs and businesses, which will simply drive them elsewhere.
The Conservative Party also remains the party of upwards social mobility, but we need to get a move on in reforming our planning laws and bureaucracy so that enough new homes are built and house prices become more affordable.
For the next few years we need a robust Conservative administration; achieving a higher savings rate; a lower current account deficit, a balanced budget and, above all, improving our productivity.