ONE of the perennial hopes of the Tory party is that it can rely on the Labour Party to be economically illiterate. Sir Keir Starmer has just demolished that assumption as he (finally) suggests that migrant workers are a problem. Typically, he’s focusing on the low pay aspect, but that’s just the beginning of it. Using migrant workers rather than homegrown slows growth.
As the chart below from World Bank data shows, our growth rate has been on a steady downward trajectory for 30 years – even in the good years.
Given the huge advances in technology since the introduction of PCs and mobile phones in the 1990s, how can this be? Perhaps there have been changes to the UK’s economic structure that have reduced the impact of trickle-down.
Like most economic theories, trickle-down is both controversial and unprovable. It goes something like this:
· Investment by Company X generates additional work and profit;
· The additional work creates additional income and profit for suppliers and workers throughout the Company X supply chain;
· At least some of the additional income and profit is spent outside of Company X’s supply chain – on better food, a smarter car, holidays, consumer goods etc;
· All that extra spend generates further income and profit outside Company X’s supply chain;
· Everyone lives happily ever after.
The investment creates Company X and the rest of the economy. The effect is quasi-exponential, with every increase of disposable income stimulating further increases.
One thing that has changed is the amount of migrant labour in the UK. To clarify, by migrant labour I mean non-UK citizens who work lawfully in the UK, pay their taxes and send much of their disposable income back to their home country. (This contrasts with people who come to UK to build their life here permanently and therefore keep their money in the UK.) The money the migrants send home can’t trickle down in the UK economy, although of course it does wonders for the migrants’ home towns.
The chart below shows the proportion of the UK’s workforce that were not born in the UK. While some of these may have naturalised and are now UK citizens and others may be completely settled in the UK, it’s a reasonable assumption that most of these are sending some of their earnings home. The data comes from ONS
Since 1997 the proportion of non-UK labour has trebled. In absolute terms it’s an additional 4.3million workers (that’s four Birminghams). This is not a bad thing – growing an economy without a workforce is impossible. But it does mean that the increase in GDP per pound invested is lower.
Migrant labour is not the only contributor to undermining trickle-down. As the chart below shows, the UK no longer makes as much as it used to. That means that a reduced proportion of the additional disposable income created by the investment in Company X is spent on UK-made products: it too is going overseas. While retailers, shippers and HMRC all increase their revenues, the profit and wealth of making the goods increasingly trickles overseas.
This not an argument against free trade nor one for autarky – neither approach would help. The UK has one of the world’s two leading global financial hubs, the City of London (second only to Wall St). Whenever the City lends, invests or performs some other service overseas, the UK makes a clip on the trade. In the boom years in a less puritan City one could see trickle-down literally at work as the profits of a good day on the markets were celebrated lavishly, converting into (overpriced) champagne, canapés and tips in the wine bars, restaurants and clubs that used to thrive in the Square Mile.
Growth comes from capital investment by the private sector. If the trickle-down effect is less powerful than once it was, a government seeking to stimulate more growth needs to stimulate more investment than it did before. Company X will invest when it calculates that the investment will add to its profits, that calculation being complicated – and quite possibly competitive between multiple options. If a government wants companies to invest more in the UK it must make it more attractive to do so. Companies are attracted by the ease of making profits, so Chancellor Hunt should be cutting corporation tax (as I have demonstrated before), cutting dividend tax and eschewing retrospective windfall taxations. Instead he seems hell-bent on achieving the opposite: increasing taxes on profits stifles trickle-down.
As Starmer has realised, we also need to maximise the proportion of UK workers in the labour force. A higher proportion of work being performed by UK residents would increase trickle-down and thus UK GDP growth. The ONS estimates that almost 22 per cent of the UK workforce (those aged 16 to 65) are not working.
The chart below gives the reasons for inactivity among those aged 16 to 65. (‘Discouraged’ workers are those who have given up seeking a job. ‘Other’ includes those awaiting the result of a job application, those who have not started a job hunt and those who did not respond.)
Of the 9million inactive, 1.7million want a job. The really shocking figure is the 2.5million people of working age who can’t work because of long-term sickness. Given free healthcare, it’s hard to believe that more than 5 per cent of the workforce has a medical reason for not working. Is the UK working age population really that infirm?
Finally the government could free some labour from the public sector, at a stroke transforming the individuals from a drain on the public purse to creators of wealth. This is not going to be delivered by incremental budgetary cuts. It will require a complete rethink of what the government should do, how it should achieve that and where the necessary workers should be employed. The chart below shows total headcount on the public purse, including things like the nationalised train companies.
The civil service is under 10 per cent of public sector employment; the problem lies in the quangos, agencies and the like. The end of Covid (should the NHS ever admit it) should free some 400,000 workers.
The good news for the country is that we are, at last, starting to have a sensible discussion about growth, which is vital to deliver a rosy economic future to our children and grandchildren. It’s also true that the government has the wherewithal to alter its policies to deliver at little up-front cost, all of which it should recoup in short order.
The bad news for the Tory party is that Truss’s failure to articulate this argument caused her downfall and has turned them into big state socialists, which is what Labour and the Lib Dems are for.
Hunt and Sunak have set us on a path to stagnation, seeking to achieve the impossible and balance their budget in one fell swoop. The problem with following orthodoxy is that, almost by definition, it precludes change – even if the world demonstrably has changed.
They’re also on a path to electoral oblivion, which I would welcome were it not to be at the cost of pointless economic sacrifice.