This is how to secure sustained economic growth
Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.
On 26 November, the UK Chancellor Rachel Reeves will present her and Labour government’s second budget to chart the future economic course.
The budget will be presented against the background of a bleak inheritance from the 2010-2024 Conservative government. Labour came to power with a promise of ‘change’ and people expected increase in prosperity and happiness. Both have been hard to deliver. The economy grew by just 0.1% in August and is likely to remain sluggish.
The government is chasing the holy grail of sustained economic growth by following a flawed economic model. Two assumptions stand out. Firstly, that rising inequalities in the distribution of income and wealth are the key to rebuilding the economy. It is assumed that poor people cowered by insecurity will somehow be more productive and can be disciplined by employers. Therefore, successive governments have squeezed low/middle income households since the 1980s. Secondly, the private sector with its selfish games will provide economic renaissance. Both are a barrier to growth.
The 1980s and 1990s saw a wave of anti-trade trade union legislation which drastically reduced the workers’ ability to bring employers to the negotiating table. Weak market power reduced wages. Zero-hour contracts and fire and rehire at low pay further squeezed households. Historically, trade unions and workers wielded political power through Labour governments, but that too has been eroded, and squeeze on wages has intensified.
In September 2025, the median wage of a UK pay rolled employee was £30,552. The average real wage has hardly moved since 2008. The Joseph Rowntree Foundation estimates that a single person needs to earn £30,500 a year to reach a minimum acceptable standard of living, whilst a couple with 2 children needs to earn £74,000 a year between them. Nearly half the workers are unable to attain a minimum standard of living. Poverty is baked into the system. 34% of Universal credit claimants are in work. Some 16% of UK adults have no savings and 39% have less than £1,000 to negotiate emergencies.
Today, the poorest 20% of population pay a higher proportion of their income in taxes than the richest 20%. Instead of redistribution, tax policy has been used to transfer wealth to the rich. The headline corporation tax rate declined from 52% in 1980 to 19% in 2017, and is currently 25%. The top marginal rate of income tax on earned income was cut from 83% in 1979 to the present 45%. The 15% investment income surcharge, mostly paid by the wealthy, was abolished in 1984. Today, capital gains and dividends are taxed at lower rates than wages. The state-led onslaught enabled concentration of wealth in fewer hands and weakened the ability of many to buy goods and services.
Just 685,500 Britons, the richest 1%, have wealth of $3.4 trillion (£2.8 trillion), compared to $2.9 trillion (£2.4 billion) held by 48m Britons, combined total of 70% of the population. The $46 billion (£38 billion) wealth of just four individuals is greater than the wealth of 20m Britons. The bottom 50% of the population has 5% of wealth, and the bottom fifth has only 0.5% of wealth. In 2022/23, the post-tax income for the richest 10% is £112,874, over 12 times higher than the poorest 10%’s post-tax income of £9,651. Instead of investing in the productive economy, the rich have isolated themselves from the rest of society. They use private schools, clinics, dentists and live in gated estates. They buy foreign villas, yachts, planes and roam the world to park their wealth. This hasn’t increased the welfare of the masses.
Successive governments have assumed that corporations can somehow identify national priorities and provide the requisite path to growth with minimal state involvement. That hasn’t been the case. The post-Second World War economic boom was based on a mixed economy in which the state directly invested in strategic industries such as oil, gas, information technology, biotechnology and aerospace. Since the 1980s, the entrepreneurial state has been restructured and transformed into a guarantor of corporate profits through privatisations, outsourcing of public services and private finance initiative (PFI). It provides subsidies to auto, steel, oil, gas, coal, biomass, shipping, internet and other businesses, without any equity stake or seats on the boards to ensure that broader public interest is served.
No company can provide a broader view of social needs and priorities of a nation. Without the entrepreneurial state, a nation is left directionless. Consider the consequences of leaving England’s water security with privatised companies. No new reservoirs have been built since 1989. There is no national water grid to transfer water from plentiful areas to areas with scarcity. Due to lack of investments, the sewage network is in a state of disrepair and tons of raw sewage is dumped in rivers and seas whilst companies chose to pay £88.4bn in dividends. Since privatisation, shareholders of water, rail, bus, energy and mail services have received around £200bn in dividends whilst infrastructure in unfit for purpose. Yet governments remain intoxicated with the myth of private sector efficiency.
In pursuit of national objectives, the government must bring essential industries into public ownership. It must take closer interest elsewhere too. The hands-off approach has handicapped the UK. In 2024, China invested 40.4% of its GDP in productive assets, whilst India put 30.5% of its GDP into productive assets. The UK invested 18.2% of GDP, well below the OECD countries’ average of 23%. To stimulate demand, the emerging powerhouses are expanding their middle class with poverty reduction programmes. The UK has shrunk its middle class with austerity and real wage cuts. Some 16m people, around 24% of the population, live in poverty.
Of necessity, corporations are focused on private interests and cannot provide a vision of national strategic priorities. This requires state-led investment into infrastructure and new technologies and priorities, and take risks that corporations may be unwilling to. However, direct investment by the UK state in new industries is miniscule as shown by the race for semiconductors and rare earth metals. China is providing $47.5bn for investment in semiconductors, and India $18.2bn. The UK is providing £10m financial support for the semiconductor industry.
Critical minerals are part of the geopolitical competition about power and industrial capacity. The insecurities have prompted countries to develop strategies to strengthen their supply chain and political autonomy. China has a near monopoly on extracting and refining rare earth metals and minerals used in the manufacture of auto, electronics, wind turbines, robotics and weapons. India has the world’s third largest deposits of rare earth minerals, but its mining and production capacities are much lower. The India government has approved tranches of $1.8bn and $2.08bn to build critical minerals industry. The UK government has developed a strategy and the House of Commons Foreign Affairs Committee said that it “is too broad to be helpful as a guide to industry, which needs realistic targets and timeframes. Nor does it convey the sense of urgency”. This week, Pensana has withdrawn from building a rare earths refinery in the UK. Nothing prevents the government from starting new industries.
The Chancellor’s budget needs to be evaluated through two lenses. These are the desperate need to reduce inequalities and increase purchasing power of the bottom 50% of the population. Sustained economic growth can’t be secured without that. Secondly, the government needs to bring essential industries into public ownership. A high quality publicly-owned infrastructure is essential for economic revival, curbing profiteering and reducing poverty. The government must invest directly, not subsidise, in vital industries whether they are green, critical minerals, semiconductors, water, energy or anything else.
The government can create money for investment; it can borrow or in the neoclassical manner raise it through taxation. The Chancellor needs to rebalance the taxation system to ensure that taxes on the bottom 50% are reduced. There are plenty of choices. For example, it can:
- Tax capital gains at the same rates as wages. This could generate £14bn. More can be raised by levying national insurance.
- Reintroduce the 15% investment income surcharge on investment incomes above £5,000. This could raise between £7.1bn and £18bn.
- Reduce tax relief on pension contributions to the basic rate of income tax for all. Currently, around 63% of the 78.2bn tax relief goes 8.3m individuals paying income tax at the marginal rates of 40% and 45%. The remaining 37% goes to 30.4m basic rate taxpayers. By restricting tax relief at the rate of 20% to all, the government will have £14.5bn spare.
- End the bogus self-employment through umbrella companies and zero-hour contracts. By forcing workers to adopt the self-employed status through umbrella companies, employers are avoiding £9.7bn in national insurance contributions a year.
- Levy a financial transaction tax. Around £9bn can be raised.
- Create new bands for council tax purposes to collect extra amounts from expensive properties.
Numerous other policy options exist to reduce inequalities and increase spending capacity of the masses. The government must also proactively invest. We now await the Chancellor’s budget.
Image credit: Lauren Hurley / DENZ – Creative Commons
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