UK Economy: Growth, Inflation and Productivity

Baroness Fox of Buckley Excerpts

Thursday 29th June 2023 Lords Chamber

[Baroness Fox of Buckley (Non-Afl)]

My Lords, I too appreciate that the noble Lord, Lord Eatwell, has tabled this debate. It feels like at last the productivity problem and the lack of business investment is being discussed. For too long, many economic policies have amounted to financial tinkering or rows over distribution. Meanwhile, growth has been demonised as either bad for well-being or destructive of the planet. Even those espousing growth rhetoric have often neglected productivity. However, it is only in raising productivity that we have the basis for improving living standards and a vehicle for new skilled, well-paid employment opportunities, rather than low-paid, insecure, unskilled jobs. Productivity increases are the only way we will escape our high-debt, low-growth economic trap.

Until recently, we have been in denial. Productivity started flatlining before the 2008 financial crisis, and indeed before Brexit. However, throughout the last decade and a half, politicians of all stripes have repeatedly claimed that the British economy was fundamentally sound and robust, and arguments instead concentrated on how it was managed. It took the triple whammy of lockdown, the post-lockdown disruption of the global supply chain and the war in Ukraine to finally force the political class to admit we have a problem and put growth on the agenda.

However, whether lockdown or war, these recent global events are not to blame for the state we are in. The UK was affected badly precisely because our internal productive capacities have been hollowed-out by decades-old deindustrialisation and our dependence on imported goods, which means much less domestic scope to compensate for foreign supply shortages. The contrast with Asia illustrates this point, where they have been better able to offset supply bottlenecks. As developing countries, they are building up, rather than eroding, their domestic productiveness. That gives them more adaptability in the face of global disruptions. As a result, consumer prices in lots of Asian countries have not risen as much as they have in the west. There is a lesson there.

I have a nagging question: could narrowly focusing on inflation levels become a distraction from deeper, protracted problems? Surely, tweaks to monetary policy cannot fix the productivity slump—quite the opposite. After all, central banks’ monetary policies and cheap borrowing from 2008 camouflaged and extended productive decay. The Bank of England pumped masses of liquidity into the economy, created all sorts of price bubbles, printed money to fund the Government’s huge pandemic shutdown and never uttered a word of opposition to the wholesale closure of the economy.

But, despite the temptation, indulging in bank bashing lets culpable politicians off the hook. Ever since Gordon Brown made the Bank of England independent in 1997, successive Governments have wilfully outsourced their responsibility for economic decisions and have distanced themselves from, for example, interest rates. Worse, this has turned national economic policy-making into a seemingly technocratic exercise, far removed from democratic accountability or voters’ influence. This must change. It is time that the state assumes transparent responsibility by taking back control of the Bank of England. I want more of the state there, running the economy.

However, I think we need less state intervention on productivity. I get nervous when, in different ways, the Tories and Labour seem to think that government should take an active role in business, whatever form that takes, whether industrial subsidies, tax incentives or public investment. My fear is that this will hinder the very innovation that it is meant to promote. State aid damagingly sustains a business status quo that can keep inefficient, low-productivity firms afloat. This zombified economy is the antithesis of dynamic, future-orientated innovation. These state policies—state aid, and monetary, fiscal and regulatory policies—tend to favour larger legacy companies at the expense of smaller start-ups, which would usually be more inventive and experimental, and likely to drive productivity higher.

In other words, state handouts encourage corporate dependence and reduce pressure on businesses to become competitive, blunting the incentive to experiment and develop better technologies. They often come with political strings, which are usually prescriptive and distort business investment activities. My pet hates are those brought on by infernal net-zero targets, let alone the dreaded mandated ESG reporting and so on.

There is plenty that the state can do to create conditions that will allow investment to flourish. It can invest heavily in public research and science R&D, as so well described by the noble Lord, Lord Eatwell. That is essential for new ideas and technological breakthroughs to occur. It can end the fixation on decarbonisation, which narrows the horizons of economic development, as well as costing working people a fortune. It can prioritise cheap, efficient and reliable energy sources, from nuclear to North Sea oil. It can focus on infrastructure deficits—for God’s sake, let us build some more reservoirs; we might even get some hydropower out of them. It needs to tackle with urgency the broken and expensive transport system and drop the ideological war on cars, vans, lorries and flights—by the way, if that means nationalising the railways, I am all good with that. It means that we drop support for the nimbyist antagonism to housebuilding and ambitiously build new towns, cities, and sites for newly emerging productive industries, as was so brilliantly motivated by the noble Baroness, Lady Thornhill.

Perhaps we also need a productivity cost-benefit analysis on legislation and regulation. Sitting through the levelling-up Bill and listening to the plethora of amendments suggesting barriers to construction, I think that it will be a miracle if anything ever gets built in the future. We need to remove the blocks to construction. Finally, we must stop relying on cheap migrant labour as a solution. We need widespread and long-term training of domestic workers at home, especially the young.