Economy: The Growth Plan 2022

Lord O'Neill of Gatley Excerpts

Monday 10th October 2022 Lords Chamber

[Lord O’Neill of Gatley (CB)]

I too add my congratulations and best wishes to my noble friend Lady Gohir, the right reverend Prelate the Bishop of Birmingham and the noble Baroness, Lady Neville-Rolfe—perhaps best wishes especially to the noble Baroness, Lady Neville-Rolfe, for serving a second stint.

Long-term economic growth is driven by two things: the growth of a country’s labour force and its productivity performance. In the decade up to the Covid shock, the UK grew by just less than 2%. Contrary to expectations prevailing immediately at the end of the financial crisis, it was mainly driven by extremely strong employment growth. Unfortunately, along with it, and maybe because of it, there was extremely weak productivity, even by our poor standards—about one-quarter of that which had prevailed. So in addition to it being rather risky in general to have a precise growth target, one would have thought that to have a notably higher one would mean you would have to generate significant belief that either or both of those two legs would be stronger. It is extremely difficult to believe that the long-term labour force growth trend will be even stronger than it was before, so the Government should have, in advance of a rather cavalier and naive tax-cutting Budget, at least tried to show that they would maintain labour force growth and evidence of dramatically improving productivity. They now somewhat desperately need to do that.

Here are four specific ideas that should be included. First, the Government should intensify their brief mention of efforts to reform pension and insurance company investment behaviour. As the chaotic gilt market sell-off highlighted, for far too long our supposed long-term investment institutions have in fact been investing far too much in supposedly lower risk investments. We need genuine long-term risk-taking and patient capital to be successful and to help a true growth investing culture.

Secondly, along with this, incentives for true risk-taking must be improved, not ill-thought-out, obsessive ideas about broad corporate taxation, which simply allow even more accountancy-style management of balance sheets and have for 20 years typically resulted in more share buy-backs and little investment.

Thirdly, the devolution process started by this Government in 2014 should be accelerated, and they must be serious about it, devolving more powers, especially on skills but also much, much more. Recent geographic ONS data—the first it has ever produced in such detail—shows that within the dreadful overall trend Greater Manchester experienced stronger productivity improvements in 2002-18 than London. It could be a fluke, but it is probably not, and is a sign of something that can work. Devolving powers should be at the heart of what this Government are trying to do to be serious.

Lastly, if I were in their shoes I would encourage the OBR to choose for itself to reduce the importance of its short-term GDP forecast changes. As talented as the OBR team is, its own cyclical forecasts jump around just like anybody else’s. The only thing guaranteed is that, like everybody else’s, they will be different the next time. This should not be confused with having a credible independent organisation, such as the OBR, that gives its best forecast of the country’s growth trend and the long-term trend of the nation’s finances.