Last week, I made the case that economic growth matters and raising the rate of growth is an admirable goal for any politician. I also complained that Liz Truss and Kwasi Kwarteng didn’t seem to know how to go about it. Tax cuts for the rich, a crude, open-ended subsidy for energy spending, all in the teeth of a surge in inflation . . . it was always a half-baked plan, made no more palatable by being generously seasoned with wishful thinking.
It’s easy to criticise, especially if you’re criticising this pair, but there was one important insight amid all their hubris and recklessness: growth matters. The UK economy has been cursed by more than a decade of stagnation, and if policies could be found that would boost the rate of growth, even back to the quarter-century preceding the global financial crisis, that would solve many of our basic economic problems.
So what could be done? One possibility is to shrink the state, leaving more room for private entrepreneurship. This sounds good to some, but Kwarteng’s “mini-Budget” merely feinted at this goal. Tax cuts do not shrink the state; spending cuts do. If the government merely borrows money to cut taxes, the private sector knows the bill will come due eventually.
In recent years, a number of serious-minded attempts have been made to think about what would be required to boost the UK’s rate of growth. One of them was the Growth Commission at the London School of Economics, which published a comprehensive review in 2012. More recently, the LSE’s economists teamed up with the Resolution Foundation to produce a report under the auspices of The Economy 2030 Inquiry. At the risk of being seduced by the blandishments of economic orthodoxy, curious readers may be intrigued to hear some of the recommendations.
- Upgrade the skills of the UK population, focusing in particular on improving schools. This sounds good, but the record of the past 12 years is not wholly encouraging. Free schools were introduced in 2011 and, according to the Education Policy Institute, have been underwhelming at primary level, although they have worked better at secondary level. That’s the good news. The bad news is that spending on schools has slipped back since 2010 in real terms. UK education spending is also reliant on private sector spending, which is unlikely to boost the skills of the most deprived.
- Improve the UK’s infrastructure and create an independent body with the power to advise parliament and to compensate those who lose out from new developments. Again, the record here is mixed. A National Infrastructure Commission was established in 2015, but it is not independent and has been reduced to warning the government not to make “vague promises”. Speaking of vague promises, I wrote recently about the Transpennine railway, and how years of vacillation have led to delays, wasted money and, ultimately, a hugely scaled-back plan. Londoners can enjoy the Elizabeth Line, at least, but London is hardly the source of the UK’s growth problems.
- Foster innovation. The received wisdom used to be that the UK’s world-class universities produced a string of invaluable breakthroughs but, lacking finance for risky ventures, those breakthroughs were often not commercialised. That was frustrating enough, but now the question is whether those world-class universities can continue to thrive against Brexit-induced headwinds that make it harder to recruit faculty from the EU, and which threaten to exclude the UK’s scientific research community from the EU’s much-admired Horizon Europe funding programme. In principle, the UK has access to Horizon; in practice, it has become a casualty of disputes over the Northern Ireland protocol.
- Encourage business investment. Business investment is substantially lower in the UK than in the US, but also much lower than in Germany or France, countries with much higher tax burdens. Could it be that the UK’s chronically poor investment is not simply a response to high taxes? Kwarteng is right to look to the tax system for opportunities to encourage business investment, but he might also consider one thing that businesses value even more than tax cuts: political and economic stability. That is not something the UK has been able to offer for the past 15 years.
- Treat Net Zero as an opportunity to increase growth and create high-quality jobs. Insulating the UK’s ageing housing stock would have been excellent preparation for a brutal winter, as well as being a source of skilled jobs in the building trade. Alas, the rate of home insulations has plummeted since 2012. And the Net Zero project hardly seems to have a champion in Liz Truss, who says there are few more depressing sights than fields full of solar panels.
You might think that none of these worthy ideas will really solve the UK’s growth problem, and you might be right. One does not simply raise the long-term growth rate of an economy. But it might be worth trying some of them out. There are certainly worse ideas for boosting growth; look around.
Written for and first published in the Financial Times on 7 October 2022.