David Willetts is President of the Resolution Foundation.
The British economy has performed poorly since the Financial Crash of 2008/9. Many of the issues at the forefront of this election campaign would look very different if we were enjoying economic growth of the thirty years before the crash.
Margaret Thatcher achieved the exceptional feat of raising the growth rate of a mature Western democracy. As a result typical household incomes rose faster in the 1980s than in any other decade over the past fifty years.
We need to repeat that achievement – though in very different circumstances. Torsten Bell’s excellent new book Great Britain? How we get our Future Back is an important guide to how that might be done.
He is now, it is true, a Labour candidate. But there is much which Conservatives can learn from his account. It draws heavily on the Economy 2030 Enquiry which we conducted at the Resolution Foundation, in partnership with the LSE. We work across political parties: Jeremy Hunt spoke at the launch of the Enquiry, as did Sir Keir Starmer.
One overwhelming message is that we do not invest enough. Public capital investment is low and erratic with frequent launches of ambitious plans quickly followed by their abandonment as the Treasury uses cuts capital spend to balance the books. Business investment fell after the Crash and then further after Brexit and hasn’t recovered.
This all shows up in the difficulty of getting stuff built in Britain: the land built on per head here has not grown since 1990, whereas it has increased in every other G7 country. Getting development done is slow because of endless legal challenges; one of the important tests of Starmer’s premiership would be how much he, as a lawyer himself, is willing to cut back radically on these prolonged legal processes.
Getting more investment is also key to levelling up. Bell shows what that a serious and ambitious levelling up strategy could have looked like. Trying to spread limited funds everywhere gets nowhere; instead there should have been a focus on Britain’s twin second cities of Birmingham and Manchester. They grossly underperform the second cities of our main competitors.
It didn’t use to be like that: Harold Wilson’s government tried to stop Birmingham getting so much investment in the 1960s. Their poor transport infrastructure means that their travel to work areas are far too small to enjoy the agglomeration and productivity gains of a city.
Only one in eight workers in Greater Manchester and one in nine in Birmingham work centrally, compared with one in three in London. Better transport links within these conurbations where the money needs to be spent (and Rishi Sunak has now made this a priority).
All this investment costs money. But we are a low saving economy and have got into the bad habit of either borrowing the money from abroad or raising money by selling our assets. We need to save more.
There is scope to do better. Auto-enrolment in personal pensions is a cross-party success story which could be extended. Furthermore, our pensions funds may now be heading into surpluses which offer an opportunity for more investment.
However, money we save is not available for consumption, and this agenda also means there is little prospect of increases in overall personal income over the coming years. To boost the incomes of the less affluent half of the population whilst this process is underway could therefore mean rebalancing the tax and benefit system, as is argued in the book.
This is where the analysis gets uncomfortable for many Conservatives. But the evidence is that Britain is unusually unequal compared with many of our competitors (apart from the US).
We can’t keep on boosting the incomes of pensioners above inflation and widening the gap between them and working age families; equality of opportunity, what many Conservatives really care about, is much harder to achieve if the rungs in the ladder are further apart.
Differences in access to capital are key to life chances. That is why council house sales were so significant, and we need similar bold initiatives to spread capital ownership now.
Moreover, it is hard to get real pressure to make the difficult decisions needed to boost our growth rate if so many of the people with power and influence are protected from the consequences of economic failure by enjoying the living standards of much more successful economies – and leaving the less affluent half of the population to bear the costs of underperformance.
We get growth through economic change – that is why economic stagnation and low living standards are inextricably linked. And shifts in relative prices are just about the most powerful mechanism for signalling how resources can be reallocated.
The growth of the regulatory state has suppressed these signals. Regulators should have an overwhelming objective of boosting growth, investment and innovation (a point Bim Afolami has recently made about City regulators).
The book ends with a reason for optimism. Ironically it come from how poorly Britain has performed. It means we can achieve a real boost just by catching up with other medium sized economies rather like us – Canada, Australia, Germany, France, and the Netherlands.
Catching up is possible now because we have a comparative advantage in the service industries which are where the strongest growth is coming from in the years ahead: the City and finance, but also performing arts and the media, architectural and engineering consultancy, higher education. It can be done.
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Author: David Willetts
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