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To listen to Andrew Bailey and Jeremy Hunt, Britain’s policymakers are up the creek without a paddle.
While growth is anaemic, high inflation means it is “really too early” for the Governor of the Bank of England to talk about interest rate cuts next year. High spending demands, on the other hand, mean that for the Chancellor, tax cuts are “virtually impossible”.
As the economy is buffeted by external shock after external shock, policymakers are left helpless, acting more like glorified pundits bemoaning the state of things than the leaders they’re supposed to be. See, for instance, the Chief Secretary to the Treasury pronouncing himself “alarmed” by the level of taxes, but also unwilling to back cuts.
As an actual pundit, this is quite confusing. From where I’m standing, the greatest barrier to British prosperity isn’t the pandemic, the war in Ukraine, a potential oil shock or the prospect of hostile AI taking over the world. It’s the unwillingness of these same policymakers to roll up their sleeves and take hard decisions.
The problems facing Britain can seem overwhelming. That doesn’t mean they actually are. List them out, and the pieces quickly begin to fall into place: our underperformance is a story about productivity. An hour’s work in Germany produces 19pc more than an hour’s work in Britain. On the same basis, an American worker produces 25pc more than their British counterpart. For what we put in, we get disappointingly little out.
We can break this difference into two parts: what we’re doing, and how we’re doing it. To take an example, if most of your population is working in agriculture, you can grow your economy quite a lot by adopting new crops, new tools, and new techniques. But you can do a lot more by shifting the population out of agriculture and into, for instance, sparkling new factories.
This sort of shift is one of the major drivers of economic development: getting people into the right places and the right jobs. It’s also what our government is devoted to blocking today.
Our housing stock is the oldest in Europe; our population still lives in the places it did a century or more ago. This isn’t because people don’t want to leave, but because they can’t. The planning system is blocking the construction of houses, offices, factories and laboratories across the country, and in the process it’s choking off growth.
The demand from companies for lab space in the “Golden Triangle” of Cambridge, Oxford and London is around 2.2 million square feet. The actual quantity available is 385,000 square feet. In March 2020, Boston had around 14.6 million available. If you were a plucky biotech newcomer, where would you base yourself?
It’s not just investment decisions, either. One of the most important determinants of individual productivity is where you are, and who you work with. If you’re in a city with a large number of graduates, in a job you have the skills to do well, you’ll be better off than if you just take whatever’s available near you. And yet British policy, as expressed through the planning system, is effectively that you should do the latter.
To give you an idea of the sheer scale of the distortion this has created, the economists Hsieh and Moretti have suggested that reducing – not eliminating – planning restrictions in just three US cities would have increased that country’s GDP by roughly 9pc, and average wages by almost $9,000. The British planning system is considerably more restrictive than its counterpart.
As John Myers has noted, these estimates imply that the introduction of the 1947 Town and Country Planning Act has done more damage to the British economy than any single event since the Black Death.
The evidence for doing something to make building easier is overwhelming. And yet, turn back to our politicians. They’re happy to bemoan Britain’s low growth rates, but when offered a simple, easy fix to unblock a tiny part of the system – scrapping so-called “nutrient neutrality” rules – they are so fearful of any criticism that they blanche at the idea.
The same unwillingness to rock the boat helps to explain the second part of our productivity shortfall. When British people have somewhere to work, they aren’t getting the best equipment available. Business investment in Britain is lower than in any other G7 country; capital intensity – the capital stock divided by hours worked – shows a similar shortfall.
The planning system blocks investment in buildings. Taxes and regulations are discouraging investment in equipment. Britain’s tax burden is at almost 40pc of GDP. Corporation tax was hiked to 25pc in April. The pensions sector, with £4.6 trillion of capital to deploy, is locked out by regulations from investing in British equities.
That’s not the only problem. Industrial electricity prices are 32pc higher in Britain than in the median country measured by the International Energy Agency. Rather than making a reduction in this cost the overwhelming focus of the state, however, official policy in the pursuit of net zero is likely to raise it further.
None of this would be hard to fix. There are technocratic steps, like making the full expensing deduction – which allows tax relief on capital investment – permanent, rather than temporary, or pushing through planned pension reforms.
Alternatively, there’s brute force: cutting taxes to encourage investment and growth, or reducing the burden of net zero on electricity prices.
There’s room to do both. The National Institute of Economic and Social Research believes the Government will have ample fiscal headroom to cut taxes. Redirecting energy policy towards the sort of cheap, efficient nuclear plants used in South Korea could be an economic boon.
The trouble is that our politicians don’t seem keen on doing either. Despite the Chancellor pledging pensions reform earlier this year, it was absent from this week’s King’s Speech. And we already know the consensus on tax cuts: not now, perhaps not any time soon.
There is no alternative to the high-tax, high-spend model. And if there is, it isn’t one it would be feasible to introduce so close to an election. Better instead to just struggle on, complaining vociferously and doing nothing, becoming poor by consensus.
There’s a crushing political consensus that Britain’s destiny is to be poor
Petrified of criticism, our politicians run from the idea that the economy can ever be fixed