1 Baroness Moyo debates involving the Cabinet Office

Thu 23rd Jan 2025

Economic Growth

Baroness Moyo Excerpts
Thursday 23rd January 2025

(1 day, 23 hours ago)

Lords Chamber
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Baroness Moyo Portrait Baroness Moyo (Non-Afl)
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My Lords, I too thank the noble Lord, Lord Farmer, for bringing this debate to the Chamber. I believe that this debate is fundamentally about determining the correct policy sequence to achieve economic growth. Do we wait for stability in government finances, even if that means raising taxes and deterring investment today, with the view that investors will return once the economy is stabilised, or should the Government prioritise protecting investors in the belief that their investment capital propels growth and in turn increases government tax-take to fund public goods? There is always a risk that a concept such as economic growth gets used so much that it becomes detached from its core elements and the inputs that drive it. As a reminder, it is worth looking at the United Kingdom’s prospects through the prism of the three classical inputs for economic growth: capital, labour, and productivity.

First, in terms of capital—in essence, how much money you have—Britain’s debt and deficits are well known to be distressed on a historic basis. Britain’s public debt-to-GDP ratio is forecast to breach 100% this year. Together with a constrained fiscus, these will be headwinds for growth. The second is labour, which pertains to the quantity and quality of the workforce. On quantity, we know that 9.3 million people between the ages of 16 and 64 were economically inactive as of the end of 2024. On quality, the latest OECD PISA assessment in 2022 shows that the United Kingdom’s scores for reading, mathematics and science all fell from those in 2018. Worse still, science scores have fallen in three consecutive PISA reports. The third is productivity, which explains roughly 60% of why one country grows and another does not. In the third quarter of 2024, UK productivity was estimated to have fallen by 1.8% versus the prior year, and the story of UK productivity is that it has grown by only 1.3% since pre-pandemic levels.

It is my sense that we are tilted too much towards stability today, taking a risky gamble that could lead to too little investment tomorrow. The Office for Budget Responsibility raised cautions of a disturbing future that awaits the United Kingdom by 2050. In its baseline projections, public spending will rise from 45% to over 60% of GDP, while revenues remain at around 40% of GDP. Debt will rise to 270% of GDP. All the while, the Government remain vulnerable to shocks, including: an ageing population with rising healthcare and retirement needs; a falling birth rate; climate change, with threats from more extreme weather, and ever rising geopolitical tensions which will demand greater defence spending.

Without investors and their investment, the picture I paint here will be materially worse. On a more granular level, it is good news that the Government included a £3.5 billion investment in the technology sector in their Budget, with £1 billion dedicated to advancing supercomputing and AI technologies. A bigger and stronger venture capital environment, from which the realised dividends would be considerable, is crucial for this long-term growth story.

Take the United States as an example. According to a Goldman Sachs report, the big six technology firms, all with roots in venture capital, added roughly $5.3 trillion of market value in 2024. This amount is larger than the current nominal GDP of every single country in the world, except the United States and China. Venture capital has significantly influenced the US economy, with some estimates saying that 43% of all public companies since 1979 were venture backed, accounting for 57% of total market value and 38% of employees.

We can drive this sort of dynamism and success here in the UK too by forging, nurturing and creating a culture of risk capital, where, beyond the traditional banking system, entrepreneurs can raise millions in seed capital to do something that has only a low chance of working but where investors bet that the expected value of the investment is still positive. I see no reason why the Government should not, through serious regulatory subsidies and tax incentives, spark the British risk appetite in the same way that the US Government help to ignite Silicon Valley.