Since 2016 the UK has had a turbulent time. Whatever our thoughts around being part of Europe are, the fact is that we have left, and if we went back in it would be much harder to get the same terms as we had before. So we must move forward.
In the last six years we have seen political instability, enforced lockdowns, higher inflation, rising rates and mass strikes.
So where does this lead us?
The latest report from the National Institute of Economic and Social Research paints a bleak outlook. We have also seen some debates around whether the UK could become the next Argentina.
The outlook is complicated. Whether it was the UK leaving the EU or COVID, or a combination of the two, the UK is facing a shortage of workers in certain sectors. But the UK is not alone in this challenge. This means that to attract workers, whether from the UK or other countries, there must be the right pay and conditions in place.
One of the challenges for Western developed economies is that infrastructure is often dated, underfunded and bureaucratic. There is often a feeling of entitlement which is not often seen in developing economies. A sense of entitlement comes as we earn more and our standard of living improves.
In a period of relatively no inflation the UK average salary has increased from around £17,500 in 1999 to £33,000 in 2022.
In 2019 25% of the UK population earned over £50,000 according to the Healthy Journal. In 2010 this was around 15%. The UK also has some unique benefits, with free health care, schooling and relatively high levels of holidays compared to countries such as the US.
The UK again like other economies has seen a sharp increase in house prices and this has meant households require larger incomes to be able to afford those houses. Unlike European countries such as Germany, the UK doesn’t have the same view of renting.
The UK is hoping that inflation will come down but in an environment where wage demand remains strong and there are inflationary factors, especially the transition to a green economy, it could be that inflation remains higher than many expect.
To combat inflation the central bank will look at interest rates. These are now at a level that many have not seen.
The challenge for an economy that has made it harder to trade with its largest partner, has creaking infrastructure and offers the expectation of a free health service, is that something must give.
According to OECD data the UK is one of highest spenders on Primary and Secondary school education. In 2019 this was 1.84% of GDP for the Primary and 2.22% for Secondary.
It is complicated when we try and compare the salaries of teachers to Europe as this is not freely available but this would need to reflect pension benefits and holidays as part of the overall package. The unrest is not just felt in the UK: in France there is a shortage of 4,000 teachers and in Germany the shortfall is expected to be 25,000 by 2025 according to euronews.com.
Assuming a UK salary starting at the lower end of e31,000 (about £28,000), this would put the UK around the same levels as Belgium, Spain and Finland.
The challenge is that if the UK wants to attract more teachers it needs to pay more but the question is where does the money come from, especially as it is one of the highest spenders based on GDP in Europe.
Then we turn to the NHS. The UK is one of the largest spenders in the health care sector in Europe. As a percentage of GDP this is 9.9%.
There is a significant difference with the UK to other countries. Countries such as France, Sweden, Netherlands, Norway, Germany and Switzerland do not offer the same free health care as in the UK (source: StMarksHospital.org.uk). It always seems that those with the best health care are those where there is an element of people paying for it.
According to WHO there is a shortage of 7 million health workers worldwide. So the UK is not alone in having a crisis in attracting staff. The UK doesn’t pay badly but it does lag other countries.
The real challenge is that if we want to fund more than we must pay more tax. UK employees pay relatively low levels of tax:
The key is that as countries become more developed they should spend more on improving infrastructure, health care and education. The UK is clearing lagging on this.
If we take Denmark the split of taxes is different:
So where does this lead us? The issues with the UK are complicated and clearly people want to be paid more because the cost of living in the UK is high, whether it is as simple as buying food or wanting to buy our first property.
However, both healthcare and education receive significant funding compared to other European countries as a percentage of GDP. Although we love the idea that we offer free healthcare, the reality is that it is no longer affordable. If we look to other countries having health insurance is normal. It is unlikely we will want to stop offering free healthcare and so the only option is to increase taxes.
The problem we have is two-fold. We have already tried to increase taxes to fund the NHS but people didn’t want to pay this and it was reversed. Secondly, if we introduce pay rises to the public sector at the levels wanted it means there is less money for the services they provide, and therefore the potential is that the services decline, and within the private sector if wages become too high then the products and services can become uncompetitive.
In summary there is some truth that the UK is the poor man of Europe, and something of its own making over many years and multiple governments. The NHS has been underfunded for decades, is bureaucratic, has significant waste and is poorly managed. If you have a bucket with holes in it, you don’t keep filling it with more water and that is what we do with the NHS. We assume more money solves the problem.
There is no easy solution but to some extent there are some hard truths we all must face. Ironically, to grow we need to make the country attractive for people to come and work. To do that we need to make the country affordable. The problem is that if we pay more then that forces up inflation, interest rates keep going up and housing becomes unaffordable (more so than now).
I liken the UK to a beautiful vintage Rolls Royce: over the years, as less money has come in there has been less money to repair it. Over time the repairs have become more about patching it up. It then comes to a point where patching is not enough and really the only choice is to invest in something new. However, no-one is brave enough to do that, and so the cycle continues.
The UK does have great companies to invest in, but the country itself is broken and needs some radicle thinking to avoid it becoming the sick man of Europe.
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