An election this year may not free up much private investment
City PM’s economics reporter Chris Dorrell looks at the big issues defining the economy.
Debates around the future direction of the election and the UK’s economic policy are framed by two parallel narratives.
On their own both of these narratives are accurate, but together they risk creating a very harmful backdrop ahead of an election.
The first narrative is that our current economic framework is failing and needs to be fundamentally reformed to reinvigorate the economy.
A slew of reports all identify the same worrying trends that hamper the UK economy. In particular, these are low levels of investment – both public and private – which in turn contribute to poor productivity growth.
UK investment is comfortably the lowest among G7 nations, having remained at around 17 per cent of GDP since the turn of the millennium. Other G7 nations meanwhile have investment rates between 20-25 per cent of GDP.
Can policies designed to spur investment break the UK out of its ‘doom loop’?
This has impacted productivity growth, which has averaged just 0.3 per cent in the UK since the financial crisis.
What makes life particularly difficult though is the second narrative, which is that the UK faces far more constraints – particularly fiscal constraints – than in the recent past. The most recent estimates put government debt at just under 100 per cent of GDP, a level last seen in the 1960s.
So we can’t go on as we are but it seems we are condemned to do exactly that.
As Jonathan Portes and Anand Melon pointed out in a report, released last week from Britain in a Changing Europe, the UK risks falling into a “doom loop”.
The second strand took on particular relevance after Liz Truss’s disastrous mini-budget.
Truss’s policies deliberately took aim at what she took to be the UK’s economic failings. The only problem was that, in a higher-rate environment, the markets were not quite sure how she was going to pay for it.
In the run-up to the election, both Labour and the Conservatives have been explicit in their ambition to try and get the UK growing again, to break the UK out of its low growth trap, but heading into an election both parties are acutely aware of the constraints that face any government that wants to turn on the spending taps.
This is why both have done so much to court businesses. If markets are unwilling to finance a wave of public sector spending, then the government needs to create the conditions for private sector investment instead.
Looking at the Conservatives, one of the most important policies announced in the Autumn Statement last year was full expensing, essentially a big tax break to incentivise business investment.
The hope of the Edinburgh Reforms, in particular Solvency II and the Mansion House Compact, is to get domestic capital investing in the UK.
Labour too presents itself as the party of business. Last week, Rachel Reeves confirmed corporation tax would remain at 25 per cent and that the cap on bankers’ bonuses would not be lifted.
Announcing the policies, Reeves spoke as if the government’s Edinburgh Reforms had not gone far enough.
Meanwhile, Labour’s £28bn pledge on green investment – which would have been funded by borrowing – has taken a back seat, partly due to market jitters. The latest reports suggest it may soon be dropped.
The question then is whether policies designed to spur investment can break the UK out of its ‘doom loop’ without the support of public spending. Public investment, after all, can stimulate private-sector spending.
This is a point that figures in the City have already been making. A report from TheCityUK last summer called for ambitious government initiatives to mobilise private sector investment.
“Private finance stands ready to invest if the government can provide the right parameters and incentives to do so,” the body said.
There’s no doubt that the next government will face a very difficult fiscal inheritance, but if there is no real ambition on public investment then there’s little hope of breaking out of the UK’s ‘doom loop’.