The UK's economic challenge
The UK faced multiple economic challenges even before the onset of the Covid-19 pandemic.
Business investment as a proportion of national income is the lowest in the G7, which helps explain the country’s poor productivity performance. The UK’s manufacturing sector is now under 10% of GDP, contributing to a large structural trade deficit. The UK has some of the largest income and regional inequalities in Europe.
The UK has also become a highly financialised economy, in which the financial sector's growth has outpaced the rest of the economy in recent decades.
One of the arguments often made is that investment and innovation are discouraged by the UK's system of corporate governance, in which the short-term interests of shareholders tend to take precedence over those of other stakeholders. Coupled with low levels of public investment, this has undermined long-term wealth creation in the economy.
Britain has had a relatively good record of jobs creation. But many of those created are low-wage and low-skill. Many workers are now on temporary, part-time or zero-hours contracts with fewer rights and benefits than full-time employees.
Cheap labour and flexible labour markets can discourage firms from making the investments in training or equipment needed to raise productivity. Both the decline of trade union membership and the casualisation of work have undercut workers' bargaining power. One result is the near-stagnation of average real wages since the 2008 financial crisis.
The IPPR Commission on Economic Justice, whose members included leaders from business, trade unions, civil society and academia, conducted a two-year enquiry into the condition of the UK economy. Its final report Prosperity and Progress calls for fundamental reform, setting out a comprehensive ten-part plan with over 70 policy recommendations.
The New Economics Foundation analyses the structural failings of the UK economy in three dimensions – environmental breakdown, social services, and people’s sense of a lack of agency and power. It proposes a comprehensive set of reforms to 'change the rules'.
The LSE Centre for Economic Performance analyses the dramatic variation in economic outcomes in different parts of the UK, before Covid. The report concludes that both more investment and greater local control of it are required in disadvantaged areas, along with benefit uplifts to raise household incomes.
Macroeconomic policy
The Covid-19 pandemic has placed a renewed focus on how governments can use fiscal policy to stabilise their economies and create jobs.
With the base interest rate at near-zero (which means that when inflation is taken into account it is actually negative) the principal tool of monetary policy - changes in interest rates - has reached its limit. The IMF and OECD have therefore recommended that governments continue with public spending to support hard-hit economies until the recovery is well established.
The policy of 'austerity' - spending cuts and tax rises - instituted in many countries after the financial crisis is now widely seen as having failed. It slowed the recovery and damaged long-term growth, which in the end is needed to reduce debt, by weakening public services and investment. It also widened inequality.
It is widely argued now that governments should exploit low borrowing costs to boost public investment. The Bank of England has been financing a large part of government borrowing during the pandemic and can continue to do so. It can hold public debt on its balance sheet indefinitely, a phenomenon known as 'monetary financing'. (See Stimulating economic recovery.)
There is also growing interest in how central banks could stimulate economic activity by transferring money directly into the hands of households. At the same time there are strong calls for central banks to use their position in the financial system to steer capital away from carbon-intensive sectors.
The IMF argues that developed country governments should maintain public spending to invest in recovery, and that debt levels can be stabilised without recourse to austerity.
IPPR has proposed a new framework for UK macroeconomic policy to give policymakers a reliable set of tools for combatting recession. It offers three areas for reform: new fiscal rules, revision of the Bank of England's mandate and a National Investment Bank.
Nobel prizewinning economist Joe Sitglitz and colleagues set out a new fiscal framework capable of dealing with uncertainties about future interest rates, shocks and climate risks. Rejecting 'fiscal anchors' - simple limits on deficits or debt as a share of GDP - they propose stronger 'automatic stabilisers' with provision for policymakers to use discretion when conditions change.
The New Economics Foundation argues for a new mandate for the Bank of England. As publicly-owned institutions, central banks should be required to support the long-term public good, including environmental sustainability.
US Treasury Secretary Janet Yellen has set out the Biden Administration's new approach to fiscal policy to address the country's longstanding economic challenges.
The Resolution Foundation argues that the UK's fiscal rules need to focus on the level of 'public sector net worth', the value (as a proportion of GDP) of the government’s total financial and fixed assets minus its debts and other liabilities. This net figure for both debts and assets would help clarify how governments can borrow to invest.
Industrial strategy
There is a growing awareness of the role the state plays in driving innovation and how industrial policy can foster sustainable economic development.
In the past UK governments have been dismissive of active industrial policies on the grounds that the market was better at determining where capital can be used most productively. But the UK's poor record of research and development, and of investment outside London and the Southeast, has prompted calls for a greater role for the state in steering investment towards economic, social and environmental objectives.
By making strategic investments in particular sectors, such as green industries, an active industrial strategy can kick-start the development and take-up of new technologies, develop new markets for UK companies, trigger greater private sector investment, and tackle major environmental challenges.
A key feature of many economies with a tradition of strong industrial strategy is the presence of state-owned investment banks, with Germany’s KfW often cited as a leading example. This has led to calls for the establishment of a UK national investment bank, to help drive higher investment into innovative firms.
A 2018 report from UNCTAD found that 84 countries (accounting for 90% of global GDP) had adopted formal industrial policies in the previous five years.
Drawing on the analysis of its founder and Director Mariana Mazzucato, the UCL Institute for Innovation and Public Purpose argues that government needs to explicitly steer the direction of economic activity in order to achieve sustainable, inclusive, investment led growth. It calls for a 'mission-oriented' approach to industrial and innovation policy.
The IPPR argues that industrial policy must go well beyond correcting market failures. It should seek to change the structure of the economy, including the volume and direction of private and public sector investment and its geographic location.
The centre-right think tank Onward has called on the Treasury to establish a national investment bank modelled on Germany's KfW as a tool to unlock capital for investment in small and medium sized enterprises, municipal infrastructure and project finance to level up lagging regions.
The Sheffield Political Economy Research Institute (SPERI) established a Commission on Industrial Strategy to examine how the state could accelerate innovation. Its final report called for a new institutional basis for industrial policy with the aim of shifting the volume and direction of investment.
Stronger local economies
Housing and land reform
Stakeholder banks
Corporate governance
Corporate governance in the UK is strongly shaped by the principle of shareholder primacy. This means that the interests of shareholders take priority over those of other stakeholders in a firm, such as workers, suppliers or consumers. There is strong evidence that this encourages an excessive focus on short-term profitability, at the expense of long-term investment.
It is often argued that the UK’s model of corporate governance should better reflect the wider interests of a company’s stakeholders, not just its shareholders. Proposed reforms include giving firms an explicit duty to pursue long-term purpose or value creation, and to tie executive pay to a range of metrics rather than just a firm's profitability or share price.
A particular focus for reform is the make-up of company boards. Advocates of worker representation on company boards - which is commonplace in many European countries - argue that it would tend to strengthen investment, because workers have a longer-term interest in their companies than short-term shareholders. By fostering a culture of cooperation between managers and workers, it would also boost productivity. There are also widespread calls for mandatory improvement in the gender and racial diversity of company boards.
The Big Innovation Centre calls for firms to have an explicit duty to pursue long-term value creation and for executive pay to be linked to long-term firm performance. They advocate for shareholders to have differential voting rights and for measures to encourage the inclusion of more long-term shareholders.
The IPPR calls for changes to company law to make it explicit that directors have a responsibility to promote the long-term success of a company and to institutionalise employee representation on company boards.
The Trades Union Congress has called for regulatory reform to give workers a voice in the running of companies, arguing this would boost productivity and overall economic performance.
Common Wealth's report on 'Asset Manager Capitalism' explores how asset management firms have become the dominant shareholders in corporations throughout the global economy. It articulates a new framework for more democratic corporate governance.
Widening ownership
The ownership of UK firms is highly concentrated. Apart from institutional investors such as pension funds, individual share ownership is dominated by the wealthy, many of whom are based overseas. Since the 1980s successive governments have privatised previously public-owned industries such as rail, water and energy. Few workers hold shares in the firms in which they work and the UK cooperative sector is smaller than in many other countries.
Over recent years there has been increasing interest in how ownership can be widened. One way is through nationalisation, in which the state would take equity stakes in companies in major sectors, such as energy or rail. Another is by giving ownership stakes in companies to their workers. This can be done either through individual or collective employee share ownership schemes.
A particular proposal is for democratic ownership funds, in which firms above a particular size would be required to transfer ownership of a percentage of their equity to funds managed by representatives of their workers. This would widen the distribution of profits and, in the process, give workers a say over how the firm is run.
The idea of widening ownership can also be applied to other assets. For example, in online transactions consumers provide large amounts of personal data for free. This data has considerable commercial value to the firms who collect it. Proposals to reform the regulation of digital companies include making ownership of data a common resource of benefit to the community or requiring private companies to make data publicly available.
Co-operatives UK's 2021 report on the UK’s co-operative sector found that co-operatives were four times less likely to close in 2020 than firms in general and the number of co-ops grew by 1.2% despite the economic downturn.
Common Wealth calls for the establishment of democratic ownership funds as a way of democratic ownership funds as a way of democratising the ownership of firms and giving employees a share of company profits.
CLES explains how promoting social enterprises (businesses with social aims and democratic structures) can address local inequalities and ensure that wealth is retained within local areas.
CLES's Community Wealth Building Centre for Excellence illustrates where and how local authorities are promoting democratic ownership across the UK.
IPPR argues that big tech companies should be required to open up their data to the public to prevent them monopolising the benefits of the digital economy and enable other businesses and civil society to use data for the public good.
The Democracy Collaborative and Common Wealth show how digital infrastructure can be democratised as a 21st century public good, underpinned by democratic ownership and governance.