Sunday, March 05, 2023
We need a plan for growth, and this one's a good start
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. Not to be reproduced without permission.

Five point plans are very much in vogue right now. Rishi Sunak has one and so does Sir Keir Starmer. Notwithstanding this, and his achievement negotiating changes in the Northern Ireland protocol and stabilising financial markets, the prime minister is often accused of not having a plan for growth. His immediate predecessor had one, mainly consisting of the thought that if you talked about growth enough it would happen. Starmer has an ambition for growth, which is to make the UK the fastest growing economy in the G7 group of big Western industrial nations, though he has yet to colour in the detail.

I may be able to offer something that could be useful to both, courtesy of Michael Saunders, who until last year was a member of the Bank of England’s monetary policy committee (MPC). He is now senior adviser to Oxford Economics, the consultancy.

His plan for growth is a seven-pointer, not a mere five, and from somebody who has watched the policy debate from a ringside seat at the Bank, it is rather interesting. His starting point is that things appear to have gone from bad to worse in terms of the UK’s growth potential, now perhaps less than 1 per cent a year, hit by the financial crisis, then Brexit, followed by the pandemic and a cost-of-living crisis mainly caused by Russia’s invasion of Ukraine. Each one has inflicted damage, and the challenge is to stop it becoming permanent.

It means that the current parliament is likely to be the worst on record for growth and living standards, with little sign of the sunlit uplands beyond.

Any plan for growth must focus on the supply side of the economy and Saunders’s first point is that there is no such institutional focus in the UK. The Treasury is a growth department in mission statement only, focused as it is on the control of public spending. The Office for Budget Responsibility (OBR) is there to make sure it does it properly, while the Bank of England’s responsibilities are the control of inflation and financial stability.

Into this mix, he suggests adding a Supply-Side Council of external experts, perhaps using the model of the National Infrastructure Commission or America’s Council of Economic Advisers. Ideally it would survive changes of prime minister and government, in a way that supply-side policies, such as they have been, have not.

Also, as he writes: “A key advantage of having such an independent supply-side council is that it would make the link from policy measures to faster potential growth (and higher tax revenues) more credible, especially for financial markets.”

A second priority, which is less likely to give certain people an attack of the vapours than a few months ago, following Sunak’s Northern Ireland breakthrough, is better relations and closer trade links with the EU. Whatever you think of Brexit, and I have made my views pretty clear over the years, the headbanger hard Brexit we have served the economy, business, and British citizens very badly. It helps explain not only slower growth, but as Saunders points out, the weaker tax revenues that have necessitated tax hikes.

Rejoining the EU is a distant prospect, however much some would wish it, but improving on the UK’s thin and unsatisfactory trade and co-operation agreement with the EU is not, particularly now.

Next, reduce childcare costs, which are higher in the UK than in competitor countries and limit female participation in the workforce and women’s career progression. “Possible measures,” Saunders writes, “could include a combination of increased government support for childcare costs (for example, a rise in the current limits for free childcare for those with children aged three-four, or an extension of the current scheme to those with children aged one-two), perhaps with priority for low-income households, and a rise in the child-to-staff ratios.”

There should also be more spending on education, particularly emphasising STEM subjects (science, technology, engineering and mathematics), in which the UK has fallen behind, a point that the prime minister appears to have recognised in calling for all students to study maths until the age of 18.

Public investment – infrastructure spending – should be 3 per cent of gross domestic product on a sustained basis, even if this means changing the fiscal rules to focus on balancing day-to-day spending and revenues, not the overall budget deficit. Over the period from 2002 to 2021 the UK had the third lowest share of public investment relative to GDP of the more than 30 members of the OECD. Governments blow hot and cold on it, cutting capital spending when the going gets tough because it is politically easier to do so.

Saunders’s final two ideas comprise one that is very familiar, though politically problematical, certainly in the Tory party, which is to increase housing supply. This can be done by easing planning constraints and also changing the way that property is taxed. We should move away from stamp duty, a tax on transactions, to other ways of taxing property, perhaps even a land value tax.

The existing system gives us high house prices, “and the large disparities in house prices between the UK's regions, which limit labour mobility and inhibit the allocation of resources to their most efficient use, thereby reducing productivity growth.”

Finally, he suggests, that in the longer-term there will need to be a higher retirement age – rising faster than the government’s planned increases in the state pension age – to guarantee labour supply.

This list, Saunders emphasises, is not exhaustive. I would add measures to incentivise business investment and innovation, as well as training to lift the skills of existing workers. Quite a bit of it has been found in this column over the years, and if you look hard enough you will find it in some of the policies this government and its predecessors have been pursuing. One or two elements even found their way into Liz Truss’s “growth, growth, growth” mantra but never saw the light of day as practical policies.

Tax cuts and deregulation, which some see as the elixir of growth, do not really stack up for this country. As he puts it: “The UK already has a relatively low aggregate tax burden, high inequality, and low overall regulation of labour and product markets. Even so, potential growth per head is relatively low. Given this, in our view it's hard to argue that the UK's supply-side problem chiefly reflects excess regulation and taxes.”

What is lacking in this country is any consistency of approach. Even on something which should be as straightforward as infrastructure spending, the government has backtracked on its ambitions, in an effort to repair the public finances after the pandemic and the scare which followed the Kwarteng-Truss mini budget last September. On current plans, public investment will settle at 2.2 per cent of GDP, close to its disappointing long run average, earlier ambitions to lift it to 3 per cent of GDP having been scaled back.

The key point is that satisfactorily addressing the UK’s growth problem is unlikely to be achieved within the timetable of a single government, or political lifetime of an individual prime minister. It should be a national mission. For we cannot afford to just drift into economic stagnation.