Counting the cost of Union: the dysfunctional UK economy

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By a Newsnet reporter

A major new report “The Dysfunctional UK Economy” has been published by the Reid Foundation, detailing the damage done to Scotland’s economy by successive UK governments which for over 30 years have had no effective regional or industrial economic policies.

The report, by renowned economist Margaret Cuthbert, covers the period since 1963, and argues that the harm caused to the Scottish economy by UK government policies is so great that independence is vital if the country is to have any chance of economic development.

 

The key finding of the report is that the economic policies of successive UK governments have benefited the economy of the London area at the expense of other parts of the UK.  In a devastating blow to the economic claims of the Better Together campaign, Ms Cuthbert details the statistics which prove that under every important economic indicator, Scotland is  worse off under Westminster rule.

GDP Growth

Scotland has underperformed relative to the UK average in terms of growth of Gross Domestic Product, a measure of economic output.  With an average annual growth rate of 2.04%, Scotland’s GDP has grown more slowly than the UK average of 2.514%.  In real terms, the GDP of the UK has increased by 329.3% over the past 50 years.  Scottish GDP has increased by 263% over the same period.  However if Scottish GDP had increased at the same rate as the UK average, the country’s economy would now be 25% greater than it currently is.

The UK average figure hides gross disparties in GDP across the 12 economic countries and regions of the UK.  London has enjoyed by far the largest growth in its GDP, and its growth dwarfs that of all other UK regions.  Five of the twelve areas which make up the countries and regions of the UK have less than half the GDP per head of London: the North East, North West, West Midlands, Wales and Northern Ireland. Scotland is in third place but GDP per head is only 58% of that for London.

The UK has by far the largest differences in regional GDP of any European nation.  The GDP per head of population in London is 4.7 times greater than that of Wales.  By way of comparison the richest economic region in France has a GDP only twice as great as that of the poorest region.  Denmark, Sweden and Finland all have a far more equitable distribution of GDP across the country.

The report warns that the disparity in the UK is of long standing, and is set to increase yet further, noting:

“Although the financial crisis had an immediate impact on London and the ‘City’; the recession and the austerity programme have had a greater and longer lasting impact on Scotland, Wales and Northern Ireland, and the more peripheral regions of England.”

Population

The report details how the faster growing economy of the south sucks in capital and labour from other parts of the UK.  This results in a loss of population from the other regions, who lose skilled and educated workers to London and the South East.  The productivity of these workers contributes to the economy of London and the South East, contributing to the growth in London’s GDP at the expense of the GDP of other UK countries and regions.

Meanwhile, continually losing capital and skilled labour, the other regions and countries of the UK find it impossible to build an economy which allows them to maintain their population.  A vicious cycle is created. 

This vicious cycle is the basic motor of the UK economy.  The continual haemorrhaging of skilled and trained workers from Scotland is an essential feature of the UK economy, which does immense damage to the future economic prospects of Scotland, not to mention the personal cost to countless Scottish families in terms of the separation of loved ones.

Between 1950 and 2000, Scotland was the only one out of similarly sized European countries to experience a decline in population.  Although Scotland’s population is once again slowly growing, its growth rate remains far behind that of England’s and the proportion of Scottish residents in the UK population continues to decline.

The report concludes:

“… population indicators show an economy which, far from moving in step with either the rest of the UK or European comparators, did not have sufficient buoyancy to give employment, and therefore a home, to its own natural growth in population. The policy instruments used within the UK were not finely enough tuned to Scotland’s circumstances to make any lasting positive effect.”

Employment

Over the past 50 years, the proportion of the UK population in full time work has fallen, in part due to the increasing proportion of elderly people.  However the fall in Scotland and the other countries and regions of the UK has been far greater than the fall in London.

There are strong disparities in the types of employment available in London compared to Scotland.  London has 14% more people in managerial, technical or professional posts than Scotland.  This imbalance is of long standing and is apparent throughout the 50 year period of the study. 

The report concludes that these disparities in employment opportunities are a result of the economic policies of successive UK governments which focussed on controlling inflation.  Such monetary policies are incapable of ironing out regional disparities within the economy, and in fact rely upon such disparities as a price worth paying.

This is evident from a statement made by Eddie George, former Governor of the Bank of England, when he replied in an interview with the BBC that job losses in the north were an acceptable price to pay for reducing inflation in the south. He added, “Monetary policy can only target the economy as a whole, not particular regions or sectors, however uncomfortable that reality might be.”

Manufacturing and industrial production

Manufacturing, once the mainstay of the Scottish economy, has been in decline in the UK for the past 40 years.  In the 1950s and 60s, there were as many as 700,000 employees in Scotland’s manufacturing industries.  By 2010 that figure had declined to just 170,000.

Although the proportion of the economy made up by manufacturing has declined in all developed nations, in many countries the manufacturing sector has continued to grow in absolute terms.  Only in the UK and Italy has manufacturing shrunk in both relative and absolute terms.

That an absolute decline in manufacturing is neither inevitable nor necessary is clear from a comparison of the UK with other developed economies.  Between 1990 and 2011 the manufacturing sector of the US economy grew by 50.5%.  Manufacturing also grew in every European country of a comparable size to Scotland:  Norwegian manufacturing increased by 12.5%, that of Denmark by 22.6%, Finland by 83.8%, while that of Ireland grew by 361.9%.  Meanwhile in the UK, the “growth” rate was minus 1.2%.

The report concludes that decline in manufacturing in the UK is a product of economic policies designed to favour the financial sector in the City of London.  The report notes:

“Competition and regulation policy in the UK, a reserved and non-devolved area, has been far more benign to takeovers than is the case in Germany and France. Compare, for example, the French response and success to the threatened takeover of Danone to that of Kraft taking over Cadbury. There is no effective industrial policy in the UK to assist small and medium sized companies to grow generically. Sustainable generic growth of companies provides few pickings for investment banks, hedge funds etc. who are the life blood of the city.”

Competitiveness

Over a number of measures of competitiveness – export performance, productivity, research and development, and skills and training – the UK performs poorly compared to other developed economies.

In terms of research and development, the UK spends a far lower percentage of its GDP on research and innovation than its major competitors.  This is spent mainly in the south, with one third of the total being spent in London.  Scotland performs relatively well, with 12% of the total UK spending, a testament to the quality of Scottish universities.

However UK Government policy has encouraged infrastructure development to be funded via PFI schemes and private contractors.  These businesses are usually headquartered outside Scotland and research and development which they commission is also largely outside Scotland.

UK productivity has declined relative to that of competitor nations, leading the report to doubt whether the UK economy “can be seen as a successful economic entity”.

Scotland does do well in terms of skills levels and higher education, however the report warns:

“Skill levels and higher education provision in Scotland do offer a labour resource and potential which is world class, but much of this potential has permanently moved South or emigrated: the long term benefit to the Scottish economy has therefore been weakened.”

Income

The UK is characterised by a wide and growing gap in incomes between richest and poorest, and between the countries and regions of the UK.  Although these differences have been evident for many decades, in recent years the gap has grown considerably widened.  The report says:

“The skewed nature of disposable income across the UK has worsened over the period studied, with disposable incomes in London pulling well ahead from the rest of the UK.”

The UK economy has no measures for reducing income disparity, and successive UK governments have shown no inclination to introduce any, as this would prejudice the interests of highly paid individuals in the financial sector. 

Housing

There is a huge disparity in housing costs between the different countries and regions of the UK.  In 2012, the average price of a house in the UK was 6.78 times what it had been in 1986.  However the increase has not been uniform across the UK.  The cost of the average house in Scotland was 51% the cost of the average house in London in 1986, but by 2012 the average cost of a house in Scotland was just 41% that of the average London house.

The cost of housing in London is largely fuelled by debt.  In 2012, the average outstanding mortgage debt in London was £250,000: more than twice that Scotland.

The higher level of housing debt in London has a negative effect on Scotland because UK economic policies favour areas with higher debt.  Such areas respond more quickly to reductions in interest rates, whereas economic recovery in areas with lower debt is far more sluggish.  The report notes:  “Where this situation arises, as it has in the UK, the monetary union is not working to the advantage of all.”

Implications for the future

The report concludes that the UK is not working as an effective economic area and monetary union, and shows no sign of reforming itself in order to reduce the growing disparity in growth and opportunity between London and the rest of the UK.  Within the UK, Scotland does not have the power to remedy the situation.

“The decline in local industrial production, particularly in the smaller countries and regions of the UK, has been allowed to continue, helped on by competition policies which have benefited companies in the City, such as investment banks, and by government infrastructure policies such as PFI which have reduced local R&D. Devolution has not given Scotland the powers to tackle these issues.”

One of the key indicators of a successful monetary union is economic convergence.  If the monetary union is operating effectively, then over time the economic differences between different regions and countries will gradually be ironed out.  However by this standard, the current Union is failing Scotland badly.

The final conclusion of the report is that a long term currency union with a dysfunctional UK economy which is characterised by chronic underperformance is not in Scotland’s interests.  Ms Cuthbert makes clear that this is due squarely to the shortcomings of the economy of the UK, and that not of a Scotland which has been and is continuing to be damaged by an economic and political union which appears irrevocably skewed in favour of the financial sector in the City of London.

“On the basis of the evidence presented here, the conclusion is that the UK has not been operating as an optimal currency area: that successive UK government policies have been more suited to the London area at the expense of most other countries and regions in the UK: that the UK has had no effective industrial or regional policy for more than thirty years, and as most industrial policy powers are reserved, Scotland has suffered accordingly: and finally, that it would not be advantageous for Scotland, in the long term, to continue to form a monetary union with the rest of the UK.”

Commenting on the findings of the report, SNP MSP Linda Fabiani said:

“As this important paper highlights, people are faced with a choice of two futures – do they want Westminster to continue running our economy or do they want these powers in Scotland’s hands?

“At present the Scottish Parliament controls just 7% of Scotland’s tax revenues and this would rise only to 15% under the Scotland Act.

“By voting Yes, Scotland controls 100% of our nation’s finances, which means we can take the policy decisions necessary to build a fairer society and stronger economy.

“As this report says only a ‘Yes’ vote would let Scotland build an alternative to the downward spiral of the UK’s low-wage, low-skill economic model’.

“These findings illustrate the scale of the opportunity presented to Scotland next September – and highlights the reasons why we cannot let that opportunity slip from our grasp.

“For Scotland truly to prosper, we need a Yes vote to enable us to create the fairer and wealthier society we all want to live in.”