UK Economy: Growth, Inflation and Productivity

Lord Wood of Anfield Excerpts

Thursday 29th June 2023 Lords Chamber

[Lord Wood of Anfield (Lab)]

My Lords, I thank my noble friend Lord Eatwell for this debate and for his excellent opening speech, which I agree with almost every word of. It is also a privilege to follow the noble Lord, Lord Lamont, from whom I always learn a lot, as I did again today on inflation.

I will make a few remarks about investment: how poor our record is, how fuzzy our thinking around it often is, and what we need to do to improve it. I fear that, historically, the left and the right have not served the cause of investment that well. The right tends to assume that investment will flow from lower taxes and a small state, when it does not, and my side of politics is often more enthused by state intervention in the cause of greater social justice than the cause of boosting business investment.

But our economy is in fundamental trouble. We have a strong record on employment, but it is no longer true for millions of families that working hard can keep their heads above water: 15 years of wage stagnation have left households £11,000 worse off each year on average. Productivity remains shockingly poor: the average of all other G7 nations is currently 16% higher. On the eve of Covid, levels of investment were the lowest in the G7, and they have been low for decades. The promise of liberalisation and deregulation has not brought the promised revolution in investment and productivity. Instead, it has brought the expected side-effects of lower wages and higher inequality.

An indicator of the depth of the problems that we face comes from just one statistic: the UK’s year-on-year inflation rate is currently 8.7%, with core inflation rising. This is the highest in western Europe and the highest in the UK since 1990. You would expect the growth rate that goes along with that to be middling to high; instead, UK growth is barely above 0%—we have an economy that is overheating at 0% growth. This tells us that something is fundamentally wrong with our supply side, with the way that the real economy works. Of course, Brexit is a huge part of that. That is the shock we chose to have, rather than the shocks like Covid and Ukraine, which we had to have. I will leave others to debate the Brexit issue, because I want to talk about investment.

In my view, the UK political debate around investment and growth suffers from considerable fuzzy thinking. Take the disaster of the mini-Budget last year, which the noble Lord, Lord Lamont, mentioned. It has left us with a national paranoia about the reaction of bond markets to policy changes but also with a misunderstanding about what alarms markets so much. The Liz Truss episode showed not that markets punish Governments who want to tax less or, indeed, borrow more but that, if you do so without setting out the fiscal plans that should accompany these decisions for the medium term, the uncertainty that that creates, for demand and for the anticipated reaction of the bank in interest rate setting, raises the risk premium on UK assets. Investment requires borrowing, of course—for people, families, firms and countries. Borrowing to invest makes sense. Sensibly planned borrowing does not spook markets, only badly planned borrowing.

The fuzzy thinking goes wider. The Government’s fiscal rules make no distinction between investment spending and current spending, which makes no economic sense. I am pleased to say that Labour’s pledge on eliminating the deficit in its own fiscal rules excludes investment spending, as it should, but there is a long way to go in the debate on both sides about a commensurate treatment of debt and targets on debt reduction.

The fuzzy thinking extends also to the relationship between investment and welfare. The health of our welfare state is crucially about the health of citizens, of course, but it also has huge implications for labour supply, as we have discovered with the link between rising sickness leave and labour shortages since Covid. Welfare policies in the UK are also far too little designed to help workers retain the skills that they have acquired when they become unemployed, because, in our country, we prefer instead the philosophy of getting people who are unemployed into any job as soon as possible. Thereby, we contribute hugely to significant skill scrapping over time.

Then there is the fuzzy thinking around how our public utilities work. The experiment of turning public utilities into privatised utilities with independent regulation has many problems, as we can see from today’s news. Chief among them is that the regulatory arrangements for utilities to have investment stimulated have not worked and the investment that has been generated is not consistent with their viability or the public purpose that they are supposed to serve. We need a mindset change, and a long hard look at the way we fail to put investment first: we use rules with contradictory approaches, and we fail to make connections between different policy areas and the drivers of productivity and investment.

So what can we do? I do not think that business investment will be transformed by tax cuts. For much of the last two decades, the UK has combined some of the lowest corporation tax rates in the G7 and the advanced world with one of the worst records in business investment in the advanced world. We need to look at the range of capital allowances; there is much more room to secure long-term expensing arrangements so that companies have certainty in the future. We should strengthen the R&D tax credits system, looking at better incentives for green and digital investment. We should be more courageous about speeding up planning laws and timeframes, especially for infrastructure projects. We also need to work on how to channel the trillions of pounds available in UK pension and insurance assets into UK companies. Currently, only just under 1% of that money goes to UK equities.

Mostly, we need a Government who use their fiscal, regulatory and procurement leverage to take a lead in public investment. Every major competitor around the world—from China to South Korea and Taiwan, from the EU to the USA—is using active state intervention on a large scale to promote investment, productivity and growth. The laissez-fairists, I am afraid, have lost the argument. The question is: what form should state leadership on investment take? I am happy that this territory is the area that my party’s shadow Chancellor is occupying at the moment. Whoever wins the next election is going to face very tough times. If Labour is in power, I hope to see a step change in the way that we as a country prioritise the stimulation of investment.