Without a proper plan, stagflation will be the least of Britain’s problems | Larry Elliot

IInflation is back in force. The cost of living has not risen so rapidly since the Falklands War. Prices are rising faster than wages. In all but one respect, this is clearly bad news. The best Britain can hope for in the coming months is a period of stagflation: weak growth and rapidly rising prices. If things get really bad, we could be on the way to an “incession” – high inflation combined with a recession. Either way, the outlook is bleak, especially for those on the lowest incomes, who spend the most on energy and food, for whom price increases are greatest.

The only consolation is that high inflation is acting as a national wake-up call. Or at least it should. For too long the UK has been drifting away convinced that all is well because cheap imports from China are keeping inflation low and rock bottom interest rates fueling a spike in oil prices. real estate. It would be nice to think that we finally woke up to reality. But that in itself is an illusion. Just as in the 1970s, structural weaknesses in the economy were exposed by a period of soaring prices.

Many of the problems are the same as five decades ago: low levels of investment, low productivity, lack of international competitiveness and exports failing to keep up with imports. Unfortunately, and unlike the 1970s, no one seems to have the first idea how to solve them.

In the 1980s, the radical right, led by Margaret Thatcher, and the radical left, led by Tony Benn, agreed on one thing: Britain had serious underlying shortcomings that had not been corrected. . Both politicians had an alternative strategy to the mainstream political consensus, which was to fend for themselves in the hope that North Sea oil would eventually come to the rescue.

Thatcher won that battle and his ideas prevailed in the decades that followed. These only really began to be challenged in the late 2000s, when free market principles brought the global banking system to the point of collapse. Yet the impact of the financial crisis has been to push the political pendulum to the right. The Conservatives have been in power for 12 years and face old and familiar issues. The current strikes, caused by high inflation, are just one manifestation of our dysfunctional economy. If Britain were a publicly listed company, its shareholders would campaign for change. They would demand precisely what is currently missing: a strategy to turn the company around. Six years after the Brexit vote, this strategy has yet to materialize.

The government’s big idea is to level up, which in part recognizes that there is a problem that needs to be fixed. But to be effective, this plan must be backed by serious investment and be part of a coordinated strategy not just to increase the size of Britain’s manufacturing base, but to develop the industries of the future. Neither the money nor the overall strategy is there. And Labor doesn’t offer much beyond platitudes either. Sir Keir Starmer’s approach is to hold his head low and hope voters don’t ask too many questions about what he would do differently as prime minister.

Here is a brief overview of the state of affairs. Britain produces more manufactured goods than it did in the 1970s, but industry’s share of the economy has fallen to less than 10% and is the smallest in the group of rich G7 countries . Most of the goods we buy – televisions, washing machines, cell phones – are imported and have been for decades. Since the early 1980s, the UK has not had a trade surplus in goods. The economy’s percentage deficit is on track to be the highest this year since the 1970s.

Britain also has the lowest investment share of any G7 country, which is not altogether surprising given its relatively small manufacturing sector. The availability of cheap labor also means that any increase in demand for a company’s products can be met by hiring more workers rather than investing in new equipment. Low investment contributes to low productivity in the UK, which lags behind the US, Germany and France.

There are certain sectors where Britain is internationally competitive, with financial and business services being at the forefront of these. These centers of strength tend to be concentrated in London and other major cities like Edinburgh and Leeds. Geographically, Britain’s prosperity is concentrated in the South East of England.

So what to do? The first thing is to accept that getting by is not the solution. Then have a plan for what the economy should look like in five, 10, 20, and 30 years. The central idea should be a bigger, cleaner and fairer economy, goals that are not incompatible with each other. Once the direction of travel has been established, the next task is to ensure that the policies of all departments are consistent with this strategy. This means the Treasury, of course, but it also means the departments of international trade, business and education. All available tools should be used.

None of this is impossible. Other countries – South Korea and Taiwan, for example – have become industrial powerhouses by having a plan and sticking to it. They didn’t, however, leaving everything to market forces and assuming everything would be fine in the end.

Larry Elliott is the economics editor of the Guardian

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