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Inputs and Outputs

Inputs and Outputs

Friday 26th July 2024

Is the UK economy as gloomy as we have been led to believe?

Could it be the return of the 'Roaring Twenties'? with parallels being drawn between the 1920's and the 2020's. The 1920's followed World War 1, a Spanish flu pandemic and then major growth in terms of new cars, planes, radio and electrical appliances. Today we've had the Covid pandemic, Ukraine War and then huge advances through technology with Artificial Intelligence and, of course, healthcare advances with the new dietary drugs, for example.

It doesn't look so good though, the tax burden as a our share of Gross Domestic Product (GDP - i.e. what we produce each year) is currently 36%, and at the end of World War II was 37%. It is projected that the percentage will take us past 37% in the next couple of years, the main reason behind this being the stealth taxes of allowances being frozen. The estimate is that the personal allowance would have increased to £16,600 by 2029/2030, had it not been frozen, so an increase of a third on the current figure. It's called a stealth tax because it's not a direct increase in the tax rate, but creeps up on you unnoticed!

This with our perceived low productivity growth performance, doesn't look good for the UK. Looking at economic performance we ranked third amongst the G7 countries (UK, US, Canada, Japan, Germany, France and Italy) with an average annual growth rate between 2010 and 2023 of 1.5% in real terms, against the average for the G7 of 1.4%. This looks reasonable, but hides the fact that our productivity per hour worked was only at 0.6% from the period 2009 to 2019. The reason for the differential was the extra 6 million people coming into the workforce and that we worked longer hours. A better measure therefore is the productivity worked per hour, which is poor and indeed since 2019 to 2023, has not improved, but stayed flat at roundabout 0.5%. In the meantime Canada, France, Germany, Italy and Japan have all fallen, France being a minus 0.9% and maybe is some answer as to why the Europeans have voted against the incumbent government, as they tackle the same disaffected groups, particularly the young.

Look back in anger?

This achieves nothing unless you learn from it and maybe the one bright spot of the disastrous Truss government was lessons learnt. Indeed, the UK looks in a strong position when you think how well the Bank of England have done, and having criticised the Bank of England in their actions previously, we applaud them having achieved such a low level of inflation against their peer group. We've had economic forecasts from the IMF of our GDP growth, and in particular, per head, being third in the G7, coming in at 6.2% with only Japan and the USA ahead of us. Indeed, the Chief Economist at the Office for National Statistics has described the economy as going "gangbusters" and the Office for Budget Responsibility has had similar forecasts.

What is this productivity growth everyone is talking about?

Productivity is simple to define - it's the amount of OUTPUT given a certain INPUT.

Higher productivity means making more widgets in a day, or scoring more goals in a match, or selling more ice cream, without hiring more workers, or buying more strikers, or hiring more ice cream vans. So how do you raise productivity? Basically, you have to make it easier for the same people to produce more stuff! More OUTPUT, same INPUTS.

The challenge of the new Government is how can they make life easier and so we produce more? The Resolution Foundation produced a briefing called" Life in the Slow Lane" and looked at the UK's productivity problems and saying how these need wide ranging reform. One of the reforms suggested was "Concentrate graduates, housing and infrastructure investment in our second cities - Birmingham and Manchester - to realise greater agglomeration benefits."

Let's compare Leeds and Marseille who have similar populations (about 800,000), Leeds has an output per worker of around £45,000, compared to Marseille's output per worker of around £57,000. Marseille is nearly 25% more productive. And that's true across other regional UK cities - with most underperforming their European equivalents in terms of productivity. Why? It's because Leeds is a sprawling city, whereas Marseille is compact. Which means that 87% of Marseille's population can get to the centre in under 30 minutes, using public transport. In Leeds, only 38% of the population can do the same.

In people terms, that's 400,000 extra Marseillais who can get to work easily, compared to Leeds. The same pattern is true more broadly. On average, only 40% of a UK city's population can get into town in half an hour, versus 67% across Europe. And that matters hugely, in lots of ways:


Plans for a tram system running between Leeds and Bradford were set out in March, as the West Yorkshire Mayor Tracy Brabin aims to revolutionise the region's transport network. It's one to watch and hope it doesn't get bogged down in red tape and controversy. It's a test of getting things done and we wish the Mayor every success with this.

Important as well though is that we tackle the housing crisis for the young. We are yet to be convinced the Chancellor targeting 1.5 million new homes, opening up the Grey Belt, will work. We don't need more "executive" housing estates, clogging up an already strained infrastructure, so taking yet more time to get to work . Any new housing plan should be prioritising what people and the economy need to thrive, which means homes for young people close to their jobs - small flats close to city centres.

The encouraging aspect, is when speaking to young adults, is how bright, well-educated, willing to listen, and interactive they are and just need a chance to shine and achieve. The youth are our future and who we should be helping, embracing and encouraging to get the growth back into the UK.

John F Kennedy: "Children are the world's most valuable resource and its best hope for the future."