Healey must be careful not to sabotage his own strategy for growth

UK Chancellor, John Healey, will this week set out his vision for growing the UK economy. Since I began writing in this paper a decade ago the UK has had eight Chancellors, and eight individual visions for growth. Healey therefore begins with a credibility problem that is not entirely of his own making. Businesses, households, and investors are fatigued and sceptical about the longevity of any new announcements. When your growth plan has been lasting, on average, little more than a year it does not lend itself to long-term commitments to help lift the UK’s trend rate of growth.

This said, as always, a new Chancellor deserves a fair hearing. Furthermore, whatever one’s political leanings, Healey warrants our best wishes. His success as Chancellor would be our success. The impact of raising economic growth on living standards, wellbeing, well-funded public services, and averting a prolonged tax squeeze is why Chancellor’s devote late nights and intellectual energy to try and make a difference.

The indications are that Healey will focus on four themes to underpin his vision for UK growth. These will be Place, Investment, Innovation, and Jobs. As themes these are no great surprise. Indeed there is a degree of thematic continuity to the plans of former Chancellors, Rachel Reeves, and Rishi Sunak.

Firstly, when it comes to “Place” this is a theme that Chancellors have steadily become more comfortable talking about over the last decade as the geopolitical tectonic plates have shifted around the world. A globalist view at the Treasury - that was simultaneously amplified and challenged by the Brexit vote in 2016 - has given way to recognition that where goods are made, and services are supported is increasingly important. Economic spillovers from production into local communities, and the strategic resilience of critical supplies of base materials, food, energy, and defence capability are being given increased prominence. The narrower benefits of trade-based comparative advantage are being (quietly) de-emphasised. When Prime Minister, Andy Burnham talks of “growth in every postcode” the explicit importance of place is to the fore.

Secondly, on “Investment” it remains the case that despite generous changes to the tax treatment of investment spending, and a special carve out of investment spending in the government’s fiscal rules, total UK investment levels lag those of comparable economies. It has done so for decades. Gross Fixed Capital Formation - the category in GDP that measures total investment - averages just 17% of UK GDP since 1980. Across the G7 this level has been 20%. This three-percentage point difference may sound marginal but compounded over almost half a century it is a huge shortfall in the building blocks for sustained economic growth. When the Prime Minister talks about “abandoning forty years of neoliberalism” the more compelling critique of that time period has been the focus on incentivising consumption, over investment. The short term over the long term.

Thirdly, on “Innovation” the UK economy, for all its travails, continues to churn out world class levels of innovation across life sciences, financial technology, the creative industries, AI, and advanced manufacturing. Whilst this remains the case the backdrop for an economic revival is supportive. Healey is right not to take this healthy pipeline for granted. The challenge is to retain a supportive ecosystem for risk-taking and failure - integral and healthy conditions for fostering innovation. Capital Gains and Inheritance Tax speculation have led to innovators questioning whether the UK is the right platform to build their businesses, and create wealth. The best that Healey can do is to be a Treasury-led bulwark against those in his parliamentary party who see wealth creators as an undertapped reservoir of tax revenue. The data is becoming increasingly clear that the speculation, and actions surrounding both these taxes is causing a flight of entrepreneurs to more welcoming jurisdictions. No-one in Britain benefits from this departure of talent.

Fourth on Healey’s list are Jobs and Skills. GDP growth in itself can be a hard sell for politicians. GDP feels quite intangible for many voters. But with almost one million young Britons not in education, employment, or training (NEETS), plentiful jobs - and the skills necessary to be successful in an AI-disrupted labour market - will be key for economic sentiment. Whilst the UK unemployment and inactivity rates both remain relatively favourable compared to other major economies, recent trends have been less encouraging. Indigestion from the combined impact of new labour market regulations, higher employer national insurance, and a National Living Wage that has grown far faster than productivity have all encouraged businesses to reduce hiring rates.

Taken together these four themes set out a decent framework for economic growth. But as can be seen by slowing jobs growth and damaging recent tax changes, a good rhetorical framework counts for little when underlying policy does is unsupportive.

My own view, having closely observed a quarter of a century of UK macroeconomic decision making, is how little attention has been paid to two Achilles heels for UK economic growth: a low and stable inflation rate, and a broad-based competitive cost of capital.

On inflation, successive governments have taken the opportunity presented by Bank of England independence since 1997 to conclude that inflation is a central bankers’ problem. This has triggered the neglect of the great enabler of low and stable prices - a healthy supply side of the UK economy. The upshot is that UK prices are now 21% higher than had inflation averaged 2% since that particular inflation target was introduced in 2004.

When it comes to the cost of capital, despite highly capitalised retail banks and institutional pension funds, the regulatory incentives to own UK productive assets have been stripped away. Pension and insurance funds' share of UK listed equities has collapsed over the decades, whilst UK government debt is no longer a core holding as defined benefit pension schemes have wound down. To describe UK retail banks are de facto property investment trusts - rather than lenders to start-up businesses, and our pension funds a highly geared bet on the US economy, is only a modest simplification of economic and financial reality.

John Healey’s ambitions for UK growth will be honest and well thought out. As were those of his predecessors. But Britain does not need another growth strategy so much as it needs the economic conditions in which a growth strategy can survive. Stable prices, abundant productive capital, and the confidence to invest for the long term. Reversing a multi-decade deterioration in those enablers of growth should be the only plan worthy of the name.