We need to rethink economic policy to bring prosperity to the whole country

In the US, real median household income is barely higher now than it was in 1990 – despite growth of around 80 per cent in GDP in the same period. In the UK, half of all households have seen no meaningful increase in their incomes since 2005. Before taxes and benefits, only 10 per cent of overall income growth in Britain between 1979 and 2012 went to the bottom half of the income distribution, with the bottom third barely sharing in it at all. The richest 10 per cent meanwhile took almost 40 per cent.

The geography of national income in the UK is even more skewed. London and the South East account for almost two-fifths of national output. Indeed, the remarkable fact is that outside those two regions, no part of the UK has got back to the level of output it had before the financial crisis in 2008.

But the weakness of the British economy goes much deeper than this, as a recent IPPR report sets out. The UK invests less as a proportion of national income than most other advanced economies, and investment has been declining for a quarter of a century. As a consequence our productivity is lower, and since the financial crisis its growth has stalled altogether. This makes raising wages almost impossible – which helps to explain why household incomes have not increased in recent years. We have a record trade deficit which has also been growing over a long period. This makes the UK deeply vulnerable to a decline in overseas’ investors’ confidence in the value of UK assets, which currently fund the deficit. The recent depreciation of sterling will benefit our exports – but so many of them are so full of imported components that the effect will be much less than it would be in a country (like Germany, say) with a stronger manufacturing sector.

At the same time the UK has an alarming fiscal gap: due to its ageing population, there is a rapidly growing divergence between future tax receipts and spending commitments, unless taxes (as a proportion of GDP) can be raised. The declining proportion of working age people relative to the young and the retired has also given us a huge ‘pensions gap’. The difference between actual pensions saving and the levels required to provide the incomes that most people expect in retirement now amounts to around 13 per cent of GDP.

The challenges facing the UK economy today are severe. We start from a fundamentally weak base, in which growth has been sustained since the financial crisis only by near-zero interest rates, rising household debt and almost continuous quantitative easing. Brexit now poses serious risks to trade and inward investment. But on top of this we will soon face a new wave of globalisation as China and other emerging economies start competing higher up the value chain. And meanwhile the new technologies of automation and machine intelligence offer huge opportunities but also serious risks of job loss and dislocation.

These challenges will require more than tinkering at the edges of economic policy, whether on left or right. Ensuring that economic growth can be sustained and its fruits properly shared across all households and regions will require some fundamental rethinking – not just of policy, but of economics itself.

Political debate and policymaking over the past half century has relied on a narrow school of orthodox economic thought, dominated by a simplistic idea of markets and market failures, and of the limited role of government. To address the problems we face today we need to draw from a richer set of economic ideas which acknowledge that wealth is not created by the private sector alone, but is co-produced by the private and public sectors. Markets are not external forces which bind firms into inevitable choices, but are created by the decisions made by private firms, public institutions, and the customs and cultures of society. Different kinds of interactions between firms and policies can generate different outcomes: policy makers can actively reshape and create markets for better ends. And the rewards can be shared more fairly: inequality is as bad for prosperity as it is corrosive to society. If growth is not low-carbon, it cannot be sustained at all.

Over the next two years the IPPR Commission on Economic Justice will be rethinking economic policy from these foundations. Comprising leading figures from across the country and the economy – from the Archbishop of Canterbury to the organiser of Citizens UK in the North East; from the CEO of Siemens to the General Secretary of the TUC – the Commission will be examining the challenges facing the UK economy and making practical recommendations for its reform. We are exploring what industrial strategy really means; how to make financial markets more long-term; how to close the class, gender and ethnic skill and pay gaps. We will look at the distribution of wealth as well as income, and how it can be made more equal. We will look at how economic policy can be devolved to the nations and regions of the UK, and how it can be decarbonised. We will think big, and consult widely.

The political revolt of 2016 asks a powerful question. It needs urgent answers. The Commission on Economic Justice aims to start a new conversation about where the British economy is going, and how it can be shaped to bring prosperity to the whole country.

Michael Jacobs is Director of the IPPR Commission on Economic Justice

The APPG on Inclusive Growth is the parliamentary partner of the IPPR Commission on Economic Justice and will be working with them throughout 2017 and 2018.