Tax the rich and end long working hours – that’s how to fix the economy
AScottish economics education, five years working as an economist, followed by 20 years representing working people at the point of production in Scottish industry has afforded me a rare insight into the relationship between economic theory and practice. It has also fired up my passion to bring about a real change and a radical rebalancing of power in the Scottish economy.
That’s why I was pleased to read two new reports on the future of the economy. The Institute for Public Policy Research’s (IPPR) distinguished Commission on Economic Justice provides a radical and visionary plan for delivering change in a post-brexit economy and the David Hume Institute’s (DHI) Scotland’s Productivity Challenge stimulates debate around a very practical agenda for change.
They complement and reinforce each other. Both reports are useful reminders of the importance of clarity in debate. The DHI report begins as it means to go on, “A country’s productivity is the single most important determinant of its average living standards and wealth.” The IPPR makes a similar point “poor productivity ... holds back growth and holds down wages”.
Both recognise the importance of long termism. So, the IPPR’S Commission notes that “the economy needs fundamental reform”, as the “weaknesses in productivity, investment and trade go back 30 years or more. They will not be addressed by incremental change or trying to ‘muddle through’.”
This is refreshing. The challenges are deep-seated and they demand a new radicalism and vitality. There have, after all, been far-reaching changes to our economic structure over the last three decades. We have shifted from being a nation of producers to being one of consumers. We have witnessed a continued contraction of manufacturing jobs and the total collapse of entire industries like mining.
We have seen the emergence of a service-led economy and a consequent impact on our balance of trade and our national accounts, but also at a human level on working lives and the sustainability of local communities too.
We have seen a transformational loss of economic and industrial ownership and control from Scotland which has strained and broken accountability in our economy even further.
Telling in the reports is an analysis that, despite a high level of skills in the workforce and favourable terms of trade– we sell exports at relatively high prices compared to the imports we buy – our labour productivity and labour force is being let down because we have low capital stock, that is low levels of business investment in machinery and equipment.
Intriguingly, the IPPR concludes that low capital investment is exacerbated by the growth of the lowwage, precarious employment economic model, with business owners getting caught up in a downward business spiral of low pay, low investment, and low productivity.
Productivity in simple terms is measured as GDP per hour worked. The long hours culture is one of the reasons why both productivity and the quality of life is dragged down.
One suggestion to tackle this is better parental leave entitlement and more holidays. But it is also long overdue that we revisit the UK optout of the European Union Working Time Directive, which means in Scotland alone more than a quarter of a million workers regularly work beyond a 48-hour week.
We need to break away from this long hours culture, not only for the sake of productivity, but also for the sake of our health, and safety.
The answer to the productivity challenge and many other industrial questions from the political right is invariably tax cuts. But there is a sleight of hand here.
Whilst the Tories have cut corporation tax from 26p to 19p, they have put up regressive taxes like VAT from 17.5 per cent to 20 per cent – hitting the poorest the hardest. So, there has been a redistribution of income and wealth, but just in the wrong direction.
Both reports eschew this tax-cutting agenda. The IPPR concludes “there is in fact little evidence that investment levels are significantly influenced by corporation tax rates” – pointing to much higher rates in more successful economies.
The DHI’S finding is that the answer to Scotland’s productivity challenge is not tax cuts, but business research and development, investment in a stronger indigenous business base and better management. They make clear that the Scottish Parliament already possesses significant powers to influence long-term economic performance, including education, health, housing, planning, transport and economic development. At the start of this year, the Scottish Government published its assessment of Brexit’s effect on Scotland. Productivity was singled out as the largest factor in the reduction in our GDP, expected to contribute a 5.8 per cent drop in economic output.
Increasing productivity is key to achieving sustainable economic development, raising incomes and creating better quality jobs. Scotland is one of the better performing parts of the UK by measure of productivity, but it is still below the UK average.
The Scottish Parliament possesses significant powers to influence long-term economic performance. It is high time they were used.
After all, the questions we now face are far too important to be left to economists alone to answer, and they certainly cannot be left to the present parties of government. If we are to bring about the real economic change we need, we will need to change our political priorities too.