The real ‘anti-growth coalition’: Five biggest barriers to the UK’s economic growth

What on earth are we to do about growth? Liz Truss railed against the “anti-growth coalition” in her speech to the Tory party conference, and met with a robust response. But there is a huge problem with the relatively slow rise in real living standards in the UK, with the poor performance dating back many years.

The Truss project will fail, and whatever view you take of her idea that lower taxation and deregulation will boost growth, the adverse response from the markets has already scuppered it. So what else will work?

Three qualifying points. First, growth isn’t everything. So increasing GDP per head (the conventional measure of living standards), while certainly desirable, needs to go alongside the fostering of a decent and equitable society.

Next, we are probably under-measuring GDP in the UK, because measuring the output of a service economy is very difficult, and this country is at the frontier of adopting new service-industry technologies. (For example, the UK has the highest proportion of retail sales online in the developed world.) And third, the UK is unusually uneven in its economic performance, both geographically and in terms of different sectors. That represents both a problem and an opportunity.

So what’s to be done? A good starting point is the work undertaken last summer by the Resolution Foundation, which looked at the poor performance and how it might be improved. It is a bit unwieldy, and Tim Harford, a writer and broadcaster on economics whom I much admire, had a shot at pulling out its main points in his column in the Financial Times. He noted the need to build skills, improve infrastructure, foster innovation, encourage investment, and treat net zero as an opportunity.

That is all very sensible, but I would put a slightly different slant on the priorities. I’d focus on productivity, because boosting that is the key driver of growth. Here are my five top ideas.

First, the government should look at what it does itself – the performance of the parts of the economy over which it has direct control. Government spending is roughly 40 per cent of the economy. Half of that consists of transfer payments, money paid back to taxpayers in pensions, social benefits and so on. That leaves 20 per cent to work on and improve.

Questions arise such as how the NHS might be more efficient, whether the police service is well run, how defence procurement could be streamlined, and so on. By running what it is responsible for better, the government would not only lift the productivity of that 20 per cent, but it would also have a demonstration effect on the rest of the economy, nudging that to do better too.

Next, skills. This is absolutely a priority, of course, and employers keep reporting difficulties in finding skilled labour. There are all sorts of plans intended to fix the problem. For example, the government brought out a plan for lifelong loan entitlement earlier this year, whereby people can borrow money for training at any stage of their lives. The CBI has an action plan to try to help companies recruit, train and retain staff. There are ranks of consultants trying to help businesses solve skills shortages. The Bank of England has done a huge amount of work on this, especially under its former chief economist, Andy Haldane. But the record is mixed at best.

My suggestion is that we should take less of a top-down approach and more of a bottom-up one. If there is a local skills shortage, where is it, and how should it be fixed? Less emphasis on national solutions, more on local problems. This is not something politicians can announce in a speech in the Commons; rather it means lots of detailed work at a company and town level.

Third, infrastructure, of course. This is, and has long been, a prime responsibility of governments everywhere in the world, and the UK has underinvested in it. We now have a UK Infrastructure Bank, but I am afraid my heart sank when I read last month that it was starting pilot schemes “to partner with local authority projects at the forefront of climate change and regional growth agenda as it starts up its advisory function”.

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That is quite admirable, but if you talk to companies about the inadequacies of our infrastructure, they will say that our roads are much worse than those on the continent, that local authorities put in schemes that cause delays, and that money is wasted on some things, while others are skimped on. And we all know how big infrastructure investments, most recently Crossrail in London, always come in late and over budget. In short, the problem is partly money, but it is also competence in the way the money is spent. We need to work out why we are so bad at this.

Fourth, investment, or rather underinvestment. Here I suggest that the problem is not high taxes, or lack of incentives, or in most cases shortages of capital – but unstable government. Companies invest for the long term. If governments keep chopping and changing regulations, altering tax rates, bringing in new reporting requirements and so on, companies have to focus on these latest changes rather than the long term.

Finally, we also need stability in trade relations. There is no point trying to rerun the whole Brexit thing, but whatever view one takes of that project in the long term, it has – in the short term – been disruptive. We need better relations with all our trading partners, including the EU, and that is a reasonable thing to ask of our government. We need to focus on why exports are allowed to be held up by bureaucratic barriers. It is the detail that matters... and we need a government that can focus on detail, not one that spouts ideology.