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The Guardian view on a dismal inheritance: the UK does not need another bout of austerity

<span>Photograph: Hollie Adams/Reuters</span>
Photograph: Hollie Adams/Reuters

Adam Smith, the father of economics, condemned as unproductive the labours of “churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers”. How wrong he turned out to be, says the Resolution Foundation thinktank. It points out that the creative industries accounted for 6% of the UK economy last year, and have grown faster than the UK economy overall since 2011.

The report, Ending Stagnation, says the last 15 years of low growth and high inequality have seen a living standards gap worth £8,300 open up between typical households in Britain and those in France, Germany and the Netherlands. It suggests fixing this by growing the UK economy through its service sector – and the work of Smith’s “grave” lawyers and “frivolous” musicians – to pay for higher investment and higher benefits.

Britain is a services superpower. It has a triple historical advantage: time zone, language and the rule of law. But the gap with rivals is shrinking. If Britain, say the report’s authors, had halved the pace of its decline in global service exports, the country would have seen an extra 585,000 highly paid jobs and boosted its GDP by 1.5%. London already accounts for far too much of services trade. If, say, finance-related activities were to be expanded, other regions must be enabled to benefit, and tough regulation enacted to prevent another economic crash.

Nearly 11 million people work in the “non-tradeable” services sector. Low-wage workers have suffered the most since 2008, and policies are needed that help them. That means improved conditions in the likes of hospitality, leisure and retail, to be paid for by higher prices for richer households. Productivity growth is not necessary for wage increases. Only the bald can avoid getting a haircut. Hairdressers’ real pay has risen since 1991 to stop workers leaving for other industries. Britain is no stranger to such change. In the late 19th century, the sector employing the largest number of women was domestic service. The foundation says it largely disappeared because new employment opportunities opened up.

Where the report is less convincing is its insistence on a budget surplus. The UK’s current account deficit averaged 4% of GDP over the last decade. Service exports would need to increase by a net £120bn, roughly, to reduce this to zero. If Britain imports more than it exports then the country lacks the private spending capacity to buy all the domestic goods and services produced. To fully employ available resources, the government should run a budget deficit. Otherwise it risks higher unemployment and avoidable private debt. Both Rishi Sunak and Sir Keir Starmer prefer the fairytale that they will be able to cut government spending to get Britain growing.

Restructuring the economy will be painful, especially as Britain wrestles with Brexit, an ageing society and the net zero transition. A fairer Britain needs more state involvement. The economy will have to be recast – through public spending and taxes – so that extra spending isn’t inflationary. Margaret Thatcher changed Britain, but at a brutal cost, especially to the poor. In contrast to the narrative of “saving the country”, Thatcherism failed to deliver, even on its own terms. Sir Keir is ahead in the polls with an election looming next year. The public wants to know that he understands how to put things right. The Labour leader should realise that citing Lady Thatcher as an inspiration won’t help voters with that.