Freezing not chilling

by Sean Rickard

In his Autumn Statement i.e., Budget, the Chancellor risibly sought to mislead by implying he had reduced the level of taxation.   The relationship between politicians and the truth has always been problematic but since the malevolent Brexit campaign, politicians seem to believe they can treat voters as fools with statements consisting of either palpable untruths and/or fantasises dressed up as facts.   Hunt’s imminent cut in National Insurance will be offset by a rising tax burden already at its highest level in 70 years, and the OBR expects real disposable income per person to undergo its largest reduction since records began in the 1950s.   What is so shoddy about the Chancellor’s Statement is that in a last ditch, and almost certainly failing attempt to improve the Tory’s dreadful election prospects, he is covertly exacerbating the decline in living standards by pencilling in, post- election, implausible spending cuts to public services already crumbling after 13 years of austerity.

Election shenanigans aside the Chancellor underlying theme was to find a way of improving the UK’s lamentable growth performance, indeed, dire would be more accurate.   Economic growth is the product of increased employment and rising productivity for all the factors used in producing goods and services.   Only steadily growing productivity – ideally 2 5 per cent or more per year – can sustain rising living standards and improving public services.   Between 1997 and 2007 (prior to the financial crash) the growth of output per hour in the UK was the second fastest of the G7 countries – clearly membership of the EU was not holding us back – but between 2016 and 2020, it was the second slowest.   Little wonder that real household disposable income has hardly increased since 2016.   In short UK living standards and public services are deteriorating because since 2010 Tory governments have failed to put in place measures to support productivity growth.

In the absence of productivity growth, the country has to rely more heavily on immigration.   Post the baleful referendum immigration from the EU has declined markedly but the post Brexit, UK controlled, immigration system has resulted in record levels of net-migration.   That said, the numbers are not as spectacular as the right-wing press would have us believe.   Short-term the numbers have been increased by the Russian invasion of Ukraine and the open invite to Hong Kong millionaires.   Moreover, some 40 per cent of the total are students and their dependents who should not in any sensible world be treated as long-term immigrants.   The spectacle of a prime minister and his erstwhile home secretary – both the children of immigrants – denigrating newcomers when they more than most should know the value such people bring to the country, is contemptible.      

Productivity growth is complex, but without fear of contradiction it is positively related to investment by both the private and public sectors.   Properly defined investment delivers a flow of wealth generating services; thus, public expenditure on the country’s infrastructure delivers faster connectivity, more research and higher skills.   But UK public investment is well below the G7 average and business investment at the bottom of the league.   Put simple, without higher, sustained investment the country has little hope of breaking out of its growth doom loop.

Mr Hunt sought to promote investment, primarily by announcing that the scheme allowing an immediate write-off of investment expenditure would be extended indefinitely beyond 2026.   So far, the scheme does not seem to have made a significant difference and the OBR expects the UK’s lacklustre business investment to fall in the near term, due to little if any growth and higher borrowing costs.   Further, the retirement rate of obsolete assets is rising steadily reflecting the growing share of shorter-lived assets, such as computer software, in the capital stock.   Making matters worse, the UK is struggling to attract foreign direct investment, with projects down nearly 30 per cent from 2016.   If Hunt is hoping that his Statement will unfreeze FDI it would be a further example of this government placing fantasies before facts.   

Britain has long suffered from low investment and below average productivity growth, in large measure because of an ideological rejection of industrial policies and an outmoded belief that low taxes and market forces would suffice to drive entrepreneurial activity.   But ask any entrepreneur; it is perceived opportunities, not lower taxes that drive innovation and investment.   In large measures opportunities are created by industrial policies, in particular, infrastructure and institutions are crucial to entrepreneurial activity.   Despite frequent declarations of support, the Tories have not pursued a credible industrial policy.   Post the malignant referendum it set up an Industrial Strategy Council only to scrap it in 2021, replacing it with a Plan for Growth which crashed with Kwarteng’s ‘mini-Budget’ in 2022.

Britain desperately needs a long-term, adequately funded, industrial policy encompassing infrastructure, education, and research.   However, such a policy will struggle to boost the growth of business investment as long as the UK remains outside the EU.   Prior to the malicious referendum, the government frequently acknowledged how vital EU membership was to the UK’s economic growth and prosperity.   In their words, businesses benefited from the opportunities inherent in unfettered access to the world’s largest market of 500 million people, involvement in pan-European supply chains and a plentiful supply of competitive inputs.   As regards FDI, it was nurtured by the UK’s status as an English-speaking bridge between the EU and the rest of the business world.   

Recently, the Deputy Governor of the Bank of England told MPs, with masterly understatement, that the fallout from Brexit had ‘chilled’ investment levels compared with other leading nations, contributing to a lower ‘speed limit’ for the UK economy.   In short, growth prospects and living standards are being seriously damaged by Brexit.   Ironically, Hunt in introducing his Statement, praised the Harrigton review of FDI whose main message was the need for a realistic UK industrial policy.   Harrigton also observed that foreign investments are going to competing countries because the UK no longer appears so attractive to overseas investors.   I rest my case.