'Th' whole worl's in a terrible state o' chassis'


Richard Jeffrey

Richard Jeffrey

Chief Economist

To all facets of the political spectrum, bar one very small one perhaps, the election result was a major surprise; moreover, it will continue to reverberate strongly in many policy areas. I had dinner with a Labour ex-Cabinet minister two days before the election, and he was predicting a 100 seat margin for the Conservatives. So, why was it that someone whose leadership has been compared unfavourably with that of Michael Foot – by members of his own party – chimed so clearly with the electorate?

At a simplistic level, voting patterns seem to be consistent with others we have seen recently, in that electors displayed a clear populist, anti-establishment bias. Arguably, this is why voters in the UK’s EU referendum defied the government-backed ‘better in’ campaign. And it seems that it has been similar anti-establishment views that have side-lined the major parties in France, having emerged as significant threats in other European elections, and also resulted in Mr Trump being elected President in the US.

Whatever else Mr Corbyn may be, he is not ‘establishment’, either in the broader sense or even in the narrower terms of the Labour party. Undoubtedly, this helped him with younger voters, who tend to be more supportive of radical change. But I do not think this is sufficient to explain the election result – it is not simply the optimistic exuberance of youth that has weakened the hold of the established political consensus. Disaffection with the prevailing status quo runs much deeper and reflects, I believe, resentments that are more economic in origin that political. In essence (paraphrasing some subversive rhetoric from the Life of Brian), many voters were responding to the implicit question ‘what has the establishment ever done for us?’

I have discussed before the problem that although economies have been growing, the average working person has not felt that he or she has been sharing in the benefits of growth. To a certain extent, this simply reflects the somewhat dreary nature of the recovery when compared to the recklessly exciting phase of growth prior to the recession. But the contrast runs deeper than this. One characteristic of the recovery common to most advanced economies has been low productivity growth rates. In real terms, it is possible to achieve sustainable increases in wages and salaries per person only if they are producing more. During the fifteen-year period prior to the recession, about two thirds of the growth in the economy could be attributed to improved productivity (output per person) and one third to increased numbers of people in employment. Hence, during this period, the average working person did share in growth (I estimate that the average real increase in wages and salaries per employee was 2.3% per annum).

Since the recession, although GDP growth has averaged 2.0%, only one third of this can be attributed to gains in productivity; and over the past five years this has dropped to just one quarter. While this has been good for employment levels and has been reflected in a much swifter decline in unemployment than had been widely expected, it has not been good for household incomes. Productivity growth between 2012 and 2016 averaged 0.5% per annum and wages and salaries per employee rose by just 0.4% in real terms. In conjunction with this, consecutive post-election governments have pursued the necessary goal of reducing the budget deficit, mainly via restricting growth in public expenditure – notably, spending on public sector wages.

So the scene was set for Mr Corbyn, with an agenda that clearly disavowed the established thinking on public spending and incorporated the end of austerity. More than that, it promised that the government would actively help improve the lot of squeezed households. Although, in the cold light of day, the budget arithmetic looked very dodgy, the electorate was more than willing to overlook this minor glitch. The irony is that Mrs May, when she became Prime Minister, acknowledged the difficult circumstances facing ‘just-about-managing families’. However, the Conservative manifesto made it clear that no help would come from the establishment; worse still, there were some obvious own goals.

So, at the heart of the Conservative’s darkness lies a similar problem to that seen in many other advanced countries: the lack of productivity-enhancing capital investment, a lack that disenfranchises the average working person from the ‘right’ to share in the benefits of growth. Just why companies have not taken advantage of low borrowing costs to raise capital spending presents another challenge to the establishment – in this case, the policy-making establishment. In my view, rather than help economies return to normal productivity and growth trends, prevailing policy regimes have locked us into low-growth and low-return economic ecosystems. Against the backdrop of ageing populations, this is a toxic mix.


Richard Jeffrey

Richard Jeffrey

Chief Economist

Richard Jeffrey was Chief Economist at Cazenove Capital until he retired in January 2018. 

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