Transcription
Britain has a new chancellor, and not the chancellor a lot of people thought it was going to be. Instead, it's this man, John Healey, former defense secretary. And it's going to be worth—well, we'll, we'll come back to it at the end, what the interesting implications might well be for the economy as a result of that.
But first of all, let's just deal with a question. When you come in as the new chancellor, you're given a big briefing by the Treasury about the state of the economy. And it's, you know, the public finances, how are they doing, what's going on in markets. But there's also something else. It's how well is productivity growing?
Cuz productivity, which is basically just how much money we're generating across the economy, how much better off we're getting, the story there is a little bit more bleak, I'm afraid. This is showing you productivity growth in various different eras going back to the 20th century. They're comparable eras here, all the way through to the 1760s. The higher the bar, the more extra wealth is being generated across the economy. And I want to show you the recent period. I have to say, I don't know for sure if they're actually going to show this to the new chancellor, but they might be a little bit embarrassed to do it.
Because when you look at this, you can see that recently, and this is not just the last government, it's going back to 2009. So it's government after government after government, we have had the weakest cumulative growth in productivity over that period of any comparable period going back, I was going to say two centuries. It's actually more than two centuries to the kind of late 1700s. Isn't that kind of extraordinary, isn't it?
So that's productivity growth in the UK. And the problem for us right now is that feeds into everything else. So weak productivity means you have weak tax revenues, which means you have weak public finances, you have weak employment, everyone gets upset. And the issue for us is it's not just a historical issue. It's also there's a geographical difference here, which is it turns out actually other countries around the world don't have quite such a problem right now.
This is just UK productivity growth. So it's the same thing, just showing you in a line form the last few years. And you can see it's a pretty flat line. That's the issue, 6.6%. Compare that to the US. So, over the same period, the US has had far more productivity growth. And one of the big issues that the UK is trying to wrestle with at the moment is, how do we get that red line up? How do we stop that divergence?
And you know, there are lots of theories about what's going on here. One of them is that in America there's lots of spending on investment. This is, you know, not just public spending. This is across the economy, spending on research and development. So, trying to get new technologies up, up, up and running. That's the US. Have a look at the same bars for the UK. We just don't spend as much on research and development. So, that's one thing. We're not spending as much on research and development.
Some people say another issue is energy prices. So, we have some of the highest energy prices anywhere in the world. That's power prices for, you know, industrial uh firms, but it's similar for domestic users as well, as you know, as we all know when you're spending uh money on your bill. It's really expensive in the UK. And if you want to re-industrialize Britain, which is what Andy Burnham has said he wants to do, then it's basically impossible with energy prices that high. It's just not going to happen. So, you have to try and do something about that.
At the same time, the infrastructure. When I say infrastructure, you know, you've got roads and rail, but these days broadband is actually a sort of infrastructure. And broadband speeds in the UK are among the slowest anywhere in Europe. So, you've got weak broadband as well. You've got weak infrastructure.
And the problem, I suppose it's a problem, but it's also an opportunity for the UK is right now, if you look at the state of our kind of employment sector, in some senses we have an opportunity with artificial intelligence, which is part of the explanation for why you've got that big growth in America. They have basically all of the AI firms. But it's not just about it whether you have the firms. It's also about whether those AI tools can go into your economy and make people better at what they're doing.
And here's what's interesting is there's something that's hopeful about this, something that's also a little bit scary. If you look at the different share of employment that is likely to be affected by AI, and that's what this, this is doing. India there, South Africa, Colombia, Brazil, the US. The red and pink bits are jobs that might well be affected by AI. The gray and kind of blue, dark blue bits, that's jobs that aren't going to be directly affected. A lot of them kind of manufacturing uh and things. But because the UK has such a big services sector, we do lots of brain work in this country, 68% of our jobs are exposed to AI.
And as I say, there's there's a positive side to this and a negative side to this. Um the positive side is that means theoretically that all of these jobs could be done far more efficiently with the help of AI. And that's the clue is in that, that, that there. Because you can actually break down some of these jobs. Some of the jobs are at genuine risk from AI. That's 30%. Some of the jobs could well be enhanced by AI. So, you know, you're using AI as a tool to make you do your job better. The UK basically has both. So, we have a threat in terms of what this is going to do to employment, but also there's this opportunity that you could have much faster growth because you're automating all of the things that we already do. So, it's a promise, but also a threat from AI for the UK.
Trade. I mean, you're probably wondering at this stage, you know, what about Brexit? What's the impact been of Brexit? There has been an impact and this is definitely again something that Andy Burnham has talked about before. Do we need to want to have a closer relationship? This is showing you how much of the UK's exports actually go across to the EU. So, basically it's, it's kind of how much of what the EU is receiving actually comes from Britain. And you can see that after the transition period when we left the EU, that line dropped down. So, we're sending less stuff to the EU. But at the same time, Europe is spending, sending just about as much stuff to us. So, certainly the trade relationship has been impacted. And again, that has an impact on the economy.
And then the other thing that Andy Burnham has talked about an awful lot is do we have a London problem? And you know, this is an interesting chart. It's showing you how much of the government's central spending goes out to London in the form of transport spending, in the form of redistribution. And look, London is really high up at the top there. But here's the catch, that's Scotland at the very top. And then London. Lots of more spending per person, this is per person, goes to London than almost every other region. But here's the catch, okay? That's showing you government spending on London.
Now, let's look at how much tax is being raised in these different regions of the UK. And here it's an even more stark picture. The majority of, by far and away the biggest amount of UK tax is generated in London. And that's the key issue that Andy, you know, Burnham and and obviously Jon Healey need to wrestle with, which is, is this a problem or an opportunity? Because there are few regions of the UK and what I've done is I've just taken one from the other here. So this is showing you which areas of the country are net beneficiaries of public money. And you've got the northeast there at the top, the northwest, the west Midlands, east Midlands, basically everywhere but London and the southeast. And which areas are net contributors? In other words, people are areas which are paying more in tax than they're taking out from the government. And basically London is by far and away the leader there. And either, you know, is that a problem or is it a solution? Well, that's going to be interesting for Andy Burnham to wrestle with.
The final thing I wanted to show you, I mentioned at the start, you know, um Jon Healey came from defense before. He left the defense, uh the MOD, because he was worried about how much money was being spent on defense and said more needed to be spent on defense. I want to show you a chart which just underlines the challenge that we're facing here when it comes to defense spending. The DIP here is the defense investment plan. And before the defense investment plan, which is the thing that he was upset about, that was where our spending on defense was heading as a percentage of GDP. After the defense investment plan, that went up a bit. But it didn't go up as much as John Healey wanted. So if he's true to what he believes in, he would like that line to be even higher.
But here's the catch, okay? If you want to get up to the 3.5% target that has been set to try and get us in line with all those other NATO countries, have a look at how much extra money we are talking about. It's 23.9 billion pounds. And I know that, you know, all these numbers are slightly abstract. Just to put that into context, if you wanted to do just, this is just for extra defense spending. If you wanted to get that extra defense spending, you're talking about raising the basic rate of income tax 3.5p. An enormous amount, one of the biggest tax rises in in modern history, just to get defense spending higher.
So we're we're going to have an interesting moment here, aren't we? Where the new Chancellor, previous defense secretary, will have to work out whether that is the path that he wants to take us on, or whether he's going to take a different path, the kind of path that all of his advisers at the Treasury would recommend to him. It's going to be very interesting indeed.