There are major problems with the British economy. It has performed less well in a number of key respects than all its major competitors for at least a century. Our growth rate has been much lower, and our inflation rates considerably higher than the world average. For the last two decades we have suffered from high levels of unemployment. For a long time, our investment in Britain, as a proportion of our national income, has been almost the lowest in the developed world. Over the last fifty years, the pound has fallen dramatically in value compared to other countries, without improving Britain's competitive position.

Since the end of World War II, the increase in world output per annum has averaged about 3.5% per annum, while the British economy has grown at an average cumulative rate of 2.2%. Over the same period, the rise in the retail price index per annum has averaged 2.0% more than for OECD countries as a whole. Registered unemployment was 1.2m when Labour lost power in 1979. During the 1980s it averaged 2.7m, and so far during the 1990s it has averaged 2.3m. The average investment rate for OECD countries since 1953 has been 21.8%, whereas for Britain it has been 17.7%. In 1967 the pound was worth 11.20 Deutsche Marks. It is now worth less than DM 3.00, having fallen to DM 2.17 to the pound in the summer of 1993.

Poor economic performance has had a number of major adverse implications for Britain. The population has had to forego increases in standards of living which it could otherwise have enjoyed. The power and prestige of the country in the world has been enormously reduced. Mainly because of much higher levels of unemployment than those which existed previously, the distribution of income has become much more uneven. The taxable capacity of the country has grown only slowly, while claims on the social security system have increased hugely, largely because of higher unemployment. The resulting financial pressure on the public sector has become correspondingly intense.

If the British economy continues to be run in the way now broadly accepted by all the major political parties in Britain, there is no reason to believe there will be any long term general improvement in its performance. We can expect to see our growth rate averaging about 2% per annum, registered unemployment fluctuating between about 1.5m and 3m, inflation continuing to run at rather above the world average, the distribution of income becoming steadily more uneven, constant problems with the public finances, and a long term reduction in the value of the pound. These predictions can be made for interlocking reasons which are explained in more detail in answers to the questions which follow.

Why will the growth rate be only about 2%

The growth rate will continue to be relatively low because, with present policies, the economy cannot be made to grow faster without a number of constraints beginning to bite. We have a fragile balance of payments position, which is liable to deteriorate unmanageably if the economy is expanded rapidly. Investment is so low in Britain, particularly for the production of goods and services which can be sold abroad, that there are potentially severe capacity constraints on expanding the economy faster. Relatively low wages and salaries in many of the sectors of the British economy depending on manufacturing and export performance produces skill shortages. Fear of inflation is therefore likely to be another major brake on expansion.

The fundamental reason why unemployment is so high, and will remain so, is that the productivity of the working labour force has grown more rapidly than the economy in recent years, and is likely to continue to do so in future. As a result of increased use of computers, better training, improved management and competitive pressures, the productivity of the employed labour force in Britain has been growing during recent decades at about 2.5% per annum. With the growth rate of 1.8% per annum achieved over the last 25 years inevitable effect is that roughly about 0.7% of the labour force has tended to lose its employment on average every year. Some of this increased worklessness shows up in the headline totals figures for registered unemployment - currently about 1.6m, but a high proportion takes the form of unwanted early retirement or voluntary redundancy, or in withdrawal from the labour market by people caught in benefit traps. A measure of the true lost working potential in Britain is the government's Labour Force Survey, which, in September 1996, showed 4.7m people who could have been employed, and another 220,000 on government training schemes. In addition, it has been estimated separately that about 480,000 of those working part time would prefer full time employment.

Why will inflation continue to be higher in Britain than elsewhere?

The basic reason why inflation has been higher in Britain than elsewhere in the past is because the economy has grown more slowly. This has caused productivity among the working population to rise less rapidly than elsewhere, reducing the capacity of the economy to absorb rising money wages with increased output, and worsening the wage bargaining environment. Since the 1950s, Britain has institutionalised a vicious spiral of low growth yet rising expectations for prosperity, leading to inflationary pressure, higher interest rates, and further diminution in growth. This has been exacerbated by deliberate pre-election booms, which refuelled the stop-go cycle and lead to a costly coincidence of high interest rates and high government borrowing. High interest rates themselves add directly to inflationary pressures, by adding to both commercial and private costs, and because they discourage the productive investment which is the real long term solution to holding inflation at bay.

The distribution of income will become more uneven for two main reasons. The first is that Britain, with a lower than average growth rate, will inevitably have average wage and salary levels which fall, in real terms, compared to the rest of the world, reflecting our lower average output per head of the population. In sectors of the economy which operate internationally, however, such as the City and entertainment, where there is a world market for talent, world incomes will still have to be paid. This will skew upwards the incomes of high earners. Second, at the other end of the scale, continuing high levels of unemployment, increasingly pressing fiscal problems, and downward cost pressures from international manufacturing competition, will continue to depress the relative incomes of large swathes of the poorer sections of the population.

Sluggish growth rates generate a chronic tendency for the number of people not working to rise in relation to those in employment, for the reasons explained above. When allied to demographic trends, producing a higher proportion of the population above working age, needing not only income support but also increasingly expensive care and medical treatment, the cost pressures on the public sector, for these and other reasons, are set to rise substantially. On the other hand, however, slow growth implies an only slowly growing tax base. Furthermore, if there continues to be a major Public Sector Borrowing Requirement every year, financed at significant positive real rates of interest, a large additional pre-emption of public resources each year is inevitable. Increasingly difficult choices are then going to have to be made between unpopular tax increases and equally highly resented reductions in public service provision.

Despite the current surge in the value of sterling, unless there is a fundamental change in macro-economic policy, the parity of pound on the foreign exchanges will continue to fall on a long term basis, as the inevitable result of Britain having higher than average levels of domestic inflation, and investing less than elsewhere in the internationally tradable sectors of the economy. The unavoidable consequence is that British exports of goods and services will become steadily less competitive, the only way out being to reduce their cost by devaluation. Attempts may be made to hold up the value of sterling, by maintaining high interests rates to attract foreign funds to London, and by deflating the economy to reduce imports - or even by joining the EU Single Currency - but these policies will in the end fail in future, just as they always have done in the past. Beyond a certain point, such policies have always turned out to be unsustainable. The political cost of maintaining them becomes unbearable. Once this point has been reached, market pressures become too great for the government to hold them back. This is likely to be the fate of British membership of European Monetary Union - if it happens - just as it was with Britain's experience in the Exchange Rate Mechanism.