UK Economy: Growth, Inflation and Productivity

Lord Monks Excerpts

Thursday 29th June 2023 Lords Chamber

[Lord Monks (Lab)]

My Lords, I add my congratulations to my noble friend Lord Eatwell for launching this debate in such a stimulating way. It has produced a lot of interesting contributions so far. While I am passing out congratulations, I also congratulate those British businesses, and their workforces, which are world-class and have excellent productivity. They are often based on respect and on working closely with employees and their trade unions. These companies have one thing in common: they take a long-term view of their operations and do not swim in the short-term waters that infect so many British companies.

We are in this mess mainly because we do not have enough companies which take this long-term view and can sustain their position in that world. We do not have enough that invest in skills, innovation and technology. Those that we do have are concentrated in the south-eastern corner of this country, our only region which matches up to the most productive regions on our near continent.

We have been aware of this problem for a long time, with the earliest echoes way back in the 1870s. There have been many initiatives by successive Governments and others over the years to see whether we can improve matters. Some useful improvements have been made, but no real game-changers have resulted in Britain being promoted into the premier league of economies. We may have been up there for very short periods of time but not in any sustained way.

The problem is that things are not getting better—they are getting worse. As has been said by others in this debate, the gap between our productivity and that of the French and Germans is widening. There has been no Brexit dividend, as was claimed by the campaigns during the referendum. The only result has been self-harm, with more to come, I fear, when EU and UK standards inevitably diverge—and they will—as people develop new products and so on in different contexts.

As reports issued this week by the Resolution Foundation and the Midlands Engine trade body highlight, this convergence carries the risk that the UK could be squeezed out of supply chains in the advanced manufacturing markets. By the way, manufacturing is sometimes written off by many economic commentators, but nearly half of UK exports are manufactures and nearly half of them go to the EU. Manufacturing really matters to this country.

What can we do to handle the divergence? First, it is important that we recognise it and that government, industry and trade unions start to think strongly about how we can avoid it. Will we copy the EU as much as we can to minimise divergence or do we have exciting new avenues to go down that will lead us to a better situation than we are in at the moment?

Would the Minister perhaps agree with me that the UK’s unique economic model might deserve some urgent attention? There are different models of capitalism: American, Nordic, German and, as we heard from the noble Lord, Lord Howell, Japanese. Ours, compared to theirs, is exhibiting some alarming, glaring weaknesses.

How is it that a private equity outfit such as Macquarie can acquire public assets using debt-laden finance, and then borrow further against those assets and the stable income streams that infrastructure companies generally have, and then pay out generous dividends and executive bonuses unrelated to the service levels that are being provided? Look at Thames Water. It has been in the news recently for its appalling performance in managing the biggest water catchment area in the country. Now we know that, financially, it is in big trouble and a possible candidate for nationalisation, because nobody else is likely to take it on. That is because of being initially laden with debt by Macquarie. Other British companies are labouring with the weight of debt not borrowed for investment in technology or for improving the skills of their workforce but to pay out dividends and executive bonuses related to shareholder value.

What can be done to make our model more long-term? Maybe we should look at how others are handling matters like this and aim for those kinds of cultures, encouraging social partnership and worker participation to grow companies’ world market share—get everybody involved in it. As my noble friend said earlier, there are many lessons to learn from other countries. We should not, by the way, be afraid of intelligent protectionism. I would like us to look closely at what President Biden and his team are doing.

Finally, what are British business schools doing to rectify some of the problems we have been talking about? I think there are too many financial engineers being turned out and not enough real engineers.