Very interesting overview of growth theories. Prompted me to think what Labour has said about how it plans to promote growth. Off the top of my head I can recall the following:
1. Stability, after years of political and economic policy chaos. I think this is necessary (having worked for years in an industry with long term investment horizons I think the importance is under-rated) but is mostly table stakes.
2. Planning reform. This could be very important - I read somewhere that every extra 100,000 houses built adds 0.8% to GDP (which would mean a value add of about £200k per property, which seems plausible). And of course local authorities in some parts of the country and (often ineffective) environmental regulations have led to several major investments being refused (from film studios to data centres). We have almost certainly been losing many £billions of investment a year because it is so hard and expensive to build.
3. Related to that is infrastructure investment, which they have talked a good game on but their plans are still quite vague (eg HS2).
4. Improved trade relations with Europe, but so far only proposals for tinkering on things like food standards that will only have a marginal effect, but perhaps will benefit specific fishing and farming communities a lot.
5. A renewed focus on industrial policy (AI, green technologies, creative, National Wealth Fund etc). This could be useful but will inevitably be a bit marginal.
I think they are all directionally right, but it is early days and they need to go further in many areas. I’m also note sure that they all need to align to one growth model as none of the above are mutually exclusive.
There’s also been no mention of tax reform that I’ve seen, and that is probably useful too given that thinks like VAT thresholds, differential treatment of self-employment and investment income to employee wages, and property taxation all have negative distortionary growth effects.
Having said that, we are only sixth months in to a 4-5 year parliament and it is possible that lots of things are being developed within government at the moment.
What I also find interesting is that it seemed to me (and perhaps others - cf Financial Times endorsement of Labour) that Reeves did have a coherent plan, based on 'securonomics'. Which while not perfectly aligning with these felt like:
- Increase investment.
- Fiscal prudence.
- Clear away regulations that would block building (housing + infrastructure).
- Industrial strategy, particularly in energy.
Though they weren't saying it, I assumed the investment would be funded by tax rises, mainly on the rich. And while I worried this might be undone by e.g. Rayner's extension of employment rights, and disliked a lot of their social policy (e.g. on education), it fundamentally made sense and gave me some hope for growth..
But actually we've seen:
- Big increase in borrowing,
- Spending going mainly on consumption or increased pay settlements - with some investment/capital budgets actually cut.
- Industrial strategy neutered via cancelling of the £37bn or other levers.
- Some planning reforms - but incremental rather than the revolution needed.
- Tax rises weirdly targeted at business and low-paid workers.
It almost feels like they knew what to say to persuade people they would deliver growth, but that perhaps they didn't really believe in the necessity of their own plan.
Reeves has a very narrow operating space because of the interconnectedness of these problems. She can’t raise debt to spend on public services to stimulate demand. She can’t offer tax cuts to spend into the economy because this will likely increase our trade deficit. She can’t deliver a huge industrial strategy because debt & timing - she needs results within the electoral cycle. She can’t rebuild trade with Europe because : politics. So she has this incredibly narrow operating space. She is trying to do the Osborne - fix the roof before you build the extension but as we know, the whole bloody house shrank & the roof kept leaking under him. She appears to have decided to fix the salient political stuff (housing & nhs) by climbing into bed with the devil (private equity, us tech companies). This is awful but I can see why. Labour does not want to rebuild UK plc from nothing, by itself, so this is a workaround. Energy is the most ambitious (& under radar) bit of the policy & has the greatest chance of restoring our industrial strength - but it’ll take 10 years. But trade policy is the conundrum. I think it’s v interesting that she went to China at a critical moment. The signal is, imo: US, if you abandon us, we’ll look elsewhere. Re: Res foundation plan to extend global services - it feels a bit thin. What’s the point in having tremendous institutions like Oxbridge/Imperial if we’re going to give up on engineering & keep selling mgt consultancy? That stuff is all supporting the magic dollar tree & has to shrink some time soon. So I hope Torsten Bell doesn’t have too influential a voice. With trade, debt, demand crises, shed be a miracle worker if she could conjure growth in a 5 year election cycle. I think she’s praying that construction & tech will self fund, create jobs & cure the sense of broken country then energy will zoom up on the outside ready to launch in term 2. I hope so!
I really liked this. It would have been better if it had argued for what needs to be done, rather than 'They need to choose'.
The productivity graph is key to everything. I spend my life helping corporates kill bad ideas and academics turn their research into companies. What I am seeing in the Midlands is that innovation efforts are too small, too hesitant, too nice.
Admittedly I come from a VC background (company operations as opposed to the finance) and so the Schumpterian approach is attractive (though I'm always surprised at how little space he allocated to it).
But it's less important about how the sausage machine works, than whether we've got one that can produce lots of sausages. If we don't make lots of sausages we don't close the gap, and if we don't close the gap we can't pay for the NHS, schools, prisons etc etc etc
So the real question is. - how do we do innovation at scale? How do we shift small businesses from being conservative to innovative? How do we reduce the failure rate? If we get 2 out of 3 of those right then we've got something to play with.
Gym shark is great - but we need dozens, if not hundreds of companies like that in the Midlands, and thousands more smaller ones in the ecosystem to be making a real difference to GDP figures.
It's not rocket science how to do this. One of the companies I work for has created £20 billion of assets under management through an awful lot of small £50k bets.
So we can reach for growth, we can grapple for it, and we can clasp it in our hands - but it requires will power and the decision to make choices that enable it. Rather than muddling on by.
I don't think all supply-side thinking should be tarred with the Truss and Kwarteng brush - there's a strong progressive / abundance movement in the US at the moment and I think there is a strong case for one in the UK too.
Just this week there was a report showing that working and middle classes are far worse off in the UK than on the continent because of high housing costs. The planning system is set up to limit house building here and it impoverishes us all. Lots more houses, energy and public transport infrastructure sounds like a good progressive agenda for a pro-growth Labour government to me.
Very interesting overview of growth theories. Prompted me to think what Labour has said about how it plans to promote growth. Off the top of my head I can recall the following:
1. Stability, after years of political and economic policy chaos. I think this is necessary (having worked for years in an industry with long term investment horizons I think the importance is under-rated) but is mostly table stakes.
2. Planning reform. This could be very important - I read somewhere that every extra 100,000 houses built adds 0.8% to GDP (which would mean a value add of about £200k per property, which seems plausible). And of course local authorities in some parts of the country and (often ineffective) environmental regulations have led to several major investments being refused (from film studios to data centres). We have almost certainly been losing many £billions of investment a year because it is so hard and expensive to build.
3. Related to that is infrastructure investment, which they have talked a good game on but their plans are still quite vague (eg HS2).
4. Improved trade relations with Europe, but so far only proposals for tinkering on things like food standards that will only have a marginal effect, but perhaps will benefit specific fishing and farming communities a lot.
5. A renewed focus on industrial policy (AI, green technologies, creative, National Wealth Fund etc). This could be useful but will inevitably be a bit marginal.
I think they are all directionally right, but it is early days and they need to go further in many areas. I’m also note sure that they all need to align to one growth model as none of the above are mutually exclusive.
There’s also been no mention of tax reform that I’ve seen, and that is probably useful too given that thinks like VAT thresholds, differential treatment of self-employment and investment income to employee wages, and property taxation all have negative distortionary growth effects.
Having said that, we are only sixth months in to a 4-5 year parliament and it is possible that lots of things are being developed within government at the moment.
Very enjoyable overview - thank you!
What I also find interesting is that it seemed to me (and perhaps others - cf Financial Times endorsement of Labour) that Reeves did have a coherent plan, based on 'securonomics'. Which while not perfectly aligning with these felt like:
- Increase investment.
- Fiscal prudence.
- Clear away regulations that would block building (housing + infrastructure).
- Industrial strategy, particularly in energy.
Though they weren't saying it, I assumed the investment would be funded by tax rises, mainly on the rich. And while I worried this might be undone by e.g. Rayner's extension of employment rights, and disliked a lot of their social policy (e.g. on education), it fundamentally made sense and gave me some hope for growth..
But actually we've seen:
- Big increase in borrowing,
- Spending going mainly on consumption or increased pay settlements - with some investment/capital budgets actually cut.
- Industrial strategy neutered via cancelling of the £37bn or other levers.
- Some planning reforms - but incremental rather than the revolution needed.
- Tax rises weirdly targeted at business and low-paid workers.
It almost feels like they knew what to say to persuade people they would deliver growth, but that perhaps they didn't really believe in the necessity of their own plan.
Reeves has a very narrow operating space because of the interconnectedness of these problems. She can’t raise debt to spend on public services to stimulate demand. She can’t offer tax cuts to spend into the economy because this will likely increase our trade deficit. She can’t deliver a huge industrial strategy because debt & timing - she needs results within the electoral cycle. She can’t rebuild trade with Europe because : politics. So she has this incredibly narrow operating space. She is trying to do the Osborne - fix the roof before you build the extension but as we know, the whole bloody house shrank & the roof kept leaking under him. She appears to have decided to fix the salient political stuff (housing & nhs) by climbing into bed with the devil (private equity, us tech companies). This is awful but I can see why. Labour does not want to rebuild UK plc from nothing, by itself, so this is a workaround. Energy is the most ambitious (& under radar) bit of the policy & has the greatest chance of restoring our industrial strength - but it’ll take 10 years. But trade policy is the conundrum. I think it’s v interesting that she went to China at a critical moment. The signal is, imo: US, if you abandon us, we’ll look elsewhere. Re: Res foundation plan to extend global services - it feels a bit thin. What’s the point in having tremendous institutions like Oxbridge/Imperial if we’re going to give up on engineering & keep selling mgt consultancy? That stuff is all supporting the magic dollar tree & has to shrink some time soon. So I hope Torsten Bell doesn’t have too influential a voice. With trade, debt, demand crises, shed be a miracle worker if she could conjure growth in a 5 year election cycle. I think she’s praying that construction & tech will self fund, create jobs & cure the sense of broken country then energy will zoom up on the outside ready to launch in term 2. I hope so!
I really liked this. It would have been better if it had argued for what needs to be done, rather than 'They need to choose'.
The productivity graph is key to everything. I spend my life helping corporates kill bad ideas and academics turn their research into companies. What I am seeing in the Midlands is that innovation efforts are too small, too hesitant, too nice.
Admittedly I come from a VC background (company operations as opposed to the finance) and so the Schumpterian approach is attractive (though I'm always surprised at how little space he allocated to it).
But it's less important about how the sausage machine works, than whether we've got one that can produce lots of sausages. If we don't make lots of sausages we don't close the gap, and if we don't close the gap we can't pay for the NHS, schools, prisons etc etc etc
So the real question is. - how do we do innovation at scale? How do we shift small businesses from being conservative to innovative? How do we reduce the failure rate? If we get 2 out of 3 of those right then we've got something to play with.
Gym shark is great - but we need dozens, if not hundreds of companies like that in the Midlands, and thousands more smaller ones in the ecosystem to be making a real difference to GDP figures.
It's not rocket science how to do this. One of the companies I work for has created £20 billion of assets under management through an awful lot of small £50k bets.
So we can reach for growth, we can grapple for it, and we can clasp it in our hands - but it requires will power and the decision to make choices that enable it. Rather than muddling on by.
I don't think all supply-side thinking should be tarred with the Truss and Kwarteng brush - there's a strong progressive / abundance movement in the US at the moment and I think there is a strong case for one in the UK too.
Just this week there was a report showing that working and middle classes are far worse off in the UK than on the continent because of high housing costs. The planning system is set up to limit house building here and it impoverishes us all. Lots more houses, energy and public transport infrastructure sounds like a good progressive agenda for a pro-growth Labour government to me.