Sunday, December 15, 2019
A big win - now Tories need to reboot the economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

The best post-election stories, as far as economic policy is concerned, are those when there is a change of government. There is the hardy perennial of the Tory chancellor Reginald Maudling leaving a note in 1964 to his Labour successor and friend Jim Callaghan, saying: “Good luck, old cock. Sorry to leave it in such a mess.”

More recently Liam Byrne, Treasury chief secretary during Gordon Brown’s Labour premiership, achieved legendary status by leaving a note for his successor in 2010, saying “I’m afraid there is no money”. Byrne, who has been quietly working away as shadow minister for digital, and was re-elected as an MP on Thursday, knows that he will have to go some for that not to be his political epitaph.

There was no need for an exchange of letters this time, unless Sajid Javid penned a note to himself, and the Tories' overwhelming victory has removed the risk of a Corbyn government. As noted here in recent weeks, that had become the big fear for business, and there has been a collective sigh of relief.

Boris Johnson's comfortable victory has not, however,removed the challenges facing the economy which, if not successfully tackled, will mean that Thursday's triumph will be followed by disappointment.

As it happens, the latest official figures went a long way to setting out the post-election economic challenge. There are two ways of measuring the economy’s annual growth rate. The conventional way is to compare the latest estimate for gross domestic product with that a year earlier. On this basis, growth in October was just 0.7%, its weakest since October 2011, when the economy was climbing groggily out of the financial crisis and had just been hit with a big VAT rise.

The other to measure growth is through the year; in other words where GDP is at the end of the year compared with the beginning. On this, the figures tell us that monthly GDP in October was exactly the same as in February, and only a smidgeon, 0.3%, above January’s level.

It would be foolish to deny that uncertainty has played a role in this; two separate bouts of no-deal worries in March and October, and the election itself. But I note that the economy was far less troubled during the election periods of 2015 and 2017, and that the growth slowdown of the past three years, its slow puncture, has now lasted long enough to be regarded as a trend.

How do we revive growth? It is always possible to bump up growth temporarily through higher government and consumer spending. A significant public spending boost for 2020-21, more than 4% in real terms on day-to-day expenditure, was announced by Sajid Javid in September.

There was, you will recall, a short-term boost for consumer spending, mainly in the form of sharply higher retail sales, in the months following the EU referendum three years ago. That has been replaced by today’s phenomenon in which many well-known retailers are hanging on for dear life.

Neither, however, point to sustainably stronger growth, or offer the prospect of lifting the economy’s growth rate much above a paltry 1% next year. The British Chambers of Commerce, whose new forecast for growth next year is precisely 1%, warns that higher government spending will not offset falling business investment and weakening net trade.

There are thus two big challenges. The first is one that has preoccupied policymakers for a long time; the economy’s unbalanced nature. Last week I highlighted figures showing the deterioration in Britain’s net overseas investment position.

Since then we have had statistics showing that, in the 12 months to October, the trade deficit in goods was a whopping £155bn, compared with £136bn in the previous 12 months. Of this, about two-thirds is in manufactures. Until 1982, Britain had never had a trade deficit in manufactured goods. Now it is roughly £100bn a year.

An economy overly dependent on consumer spending does not have to run eyewateringly large trade deficits. Thanks to the peculiarity of the UK industry – we export most of the cars we make here, while importing most of those we buy – trade in cars was roughly in balance in 2017 and 2018. But the writing is on the wall for the model that UK-based carmakers have relied on, frictionless trade with the EU by virtue of the single market, allowing integrated supply chains, which has enabled that peculiarity. UK car production in the first 10 months of the year was down by 14.4% on a year earlier.

Correcting those wider imbalances would, however, require something for which there has been scant evidence recently. Though holidaying at home has become more popular as a result of sterling’s weakness, consumers and businesses have not switched to any significant degree to domestic rather than imported products. Hence the widening of the trade deficit; and the investment in new industrial capacity to change that has not been there.

This relates to the second big challenge. The only way of generating sustainable long-term growth is by increasing investment – public and private – and turning around a dismal productivity record. I had forgotten but there was a brief period early in the economy’s post-crisis recovery, in 2010 and 2011, when productivity growth temporarily hit 2%. That is now a distant memory. Over the past 12 months it has fallen by 0.5%. Business investment, meanwhile, is stuck pretty much where it was in the second quarter of 2016.

The better the quality of investment, and the more R & D intensive it is, the more that it can result in the innovation that changes the economy and increases its dynamism. I recently quoted a paper by Professor Richard Jones of Sheffield University, which uses this as the basis of what he describes as the resurgence of the regions, which is well worth reading.

When I have tested the idea of a reboot of Britain’s economy on business people, driven by an upsurge in investment and a productivity revival, I am met with bucket loads of scepticism. For many businesses, the current period is all about managing a change that they mainly did not want. When I wrote in the run-up to June 2016 that a vote for Brexit would preoccupy business for years to the exclusion of much else, it was very much with this on mind. So it has proved.

Many businesses, meanwhile, have plenty of reasons to hold back on investment. Most obviously they want to see what the future trading arrangement will look like but they have also seen little so far from this government to suggest that its broad approach will be a business-friendly one. Merely avoiding the very unfriendly alternative is not enough.

There are exceptions. Big tech companies, less directly affected by Brexit, have continued to invest in Britain. But this has not been enough to lift the pall hanging over business investment, which if we are not careful, will be with us for a long time yet.