My Lords, a few days ago there was an historic event: an inflation-busting 9.5% pay demand was submitted by that hotbed of union militancy, the clergy of the Church of England. This is just one further indication of the economic desperation suffered by most of Britain, including the clergy, as average real pay has fallen lower and lower. It is now down to the same level as 2007—and that is even before the impending rise in the cost of mortgages.
The only sustainable way to recover real incomes, and hence cut inflation, is to increase productivity—output per head. Increasing productivity requires investment that expands productive capacity and incorporates innovation. Investment requires the confident prospect of future growth. Achieving that nexus between investment, productivity and growth is the fundamental challenge that we face.
The past 15 years have been tough for the world economy. Every country has endured the shocks of the global financial crisis, the global pandemic, and the devastating impact of the war in Ukraine on energy and food prices. Yet since 2010, in the crucial variables of investment and productivity, Britain has done consistently worse than comparable countries. Since 2010, year on year, investment as a share of UK GDP has been the lowest in the G7 every year. On productivity, the National Institute of Economic and Social Research argued in a comprehensive study:
“In the years leading to the global financial crisis, the UK was closing the gap on its international competitors; UK productivity was growing at a faster pace than the United States in the pre-2007 period. This has changed since 2007, with productivity growth rates collapsing in the UK, more so than in most advanced economies”.
The result of this succession of low productivity and low investment is that, in 2009, typical household incomes in Britain were roughly the same as in France and Germany, whereas 10 years later they are 16% lower than in Germany and 9% lower than in France. The persistent economic underperformance of the past decade is the key to why Britain is today locked into low growth and high inflation, with ever-rising taxes and interest rates, and why the public realm is in an advanced state of breakdown as despairing public sector workers suffer even severer cuts in real income.
Why has this happened? The explanation is not hard to find. In the face of every major shock suffered by the economy over the past 13 years, the Government have time after time taken the wrong decision. In every case, misguided government policies damaged investment, growth and productivity. In the first half of 2010, the UK economy was recovering strongly from the shock of the global financial crisis, but the cost of rescuing the banks and supporting the economy in the downturn had left the UK with a high level of debt relative to GDP.
Any serious study of economic history demonstrates beyond doubt that the only enduring way to reduce the debt to GDP ratio is to grow GDP. Accordingly, in the first half of 2010, the Chancellor, Alistair Darling, had steered the economy on to a steady growth path, approaching an annual growth rate of 3%. In May of that year, the new Chancellor, George Osborne, reversed Darling’s policy and austerity killed the growth rate stone-dead. Austerity was supposed to cut the debt; the trouble was that it cut GDP too. To the Chancellor’s continuing puzzlement, despite his having eviscerated public spending, the debt to GDP ratio did not fall as predicted. He had chosen the wrong policy. The damage that Osborne’s austerity did to the foundations of growth and productivity lives on to this day.
The next major economic shock to the UK was the vote to leave the European Union just seven years ago. Following the referendum result, the Conservative Government took the wrong decision once again. Instead of negotiating a close relationship with our largest trading partner post Brexit, they decided on a so-called hard Brexit, raising trade barriers and exiting supply chains. The result has been that, since the referendum, while the value of French exports has grown by 16% and that of German exports by 23%, demand for UK exports has grown by just 6%. The growth of business investment in Britain, which had shown a sharp recovery in the three years before 2016, stopped dead and has never fully recovered to this day. That is what happens when you make the wrong decision and give up the supreme trading advantages of close proximity to the world’s largest free trade area.
Next came the double whammy of the pandemic and the war in Ukraine. The new Government, led by Liz Truss, correctly identified Britain’s fundamental economic weakness—the slow rate of growth. But once again, the Conservative Government chose the wrong policy—in this case, fiscal incontinence. Instead of tackling directly the low-investment, low-growth problem, they sprayed—or planned to spray—tax cuts on the better-off. They ignored the fact that similar tax cuts for the wealthy by Donald Trump had had no lasting impact on US growth. The result of that Conservative mini-Budget has been soaring interest rates and a collapse in confidence, hammering investment and growth yet again.
The 7 million-plus NHS waiting list, the 2 million-plus fall in the labour force, the world-beating rate of inflation and spiralling mortgage rates are all the result of a succession of bad policy choices made by Conservative Ministers at crucial times in the past 13 years. And now the Chancellor is at it again. He tells us:
“We have to do everything we can as a government … to squeeze inflation out of the system”.
Yet while the Government tighten their hands around the throat of the British economy, has the Chancellor not noticed that the inflation rate in France is just over 5% and falling and in Spain just over 3% and falling? What did they do? Both the French and Spanish Governments have deliberately targeted support notably on food prices and on the lowest wage earners. In doing so, they weakened the damaging link between the first round of food and energy inflation and the second round of wage inflation. Core inflation has been driven by desperate attempts to protect the standard of living. So, by contrast with the French and the Spaniards, Jeremy Hunt is determined to squeeze working people into accepting a lower standard of living, whatever damage may be done to investment in growth. This string of bad decisions, from austerity to EU trade, to fiscal incontinence, to squeezing the economy, has undermined investment and growth for the past 13 years.
That raises another issue. Why has Conservative economic decision-making been so bad? After all, everybody can make the occasional mistake. But to make decisions that damage investment and growth over and over again is more than just careless. Perhaps the answer lies in the Conservative characterisation of the state as a burden on the wealth-creating private sector, allied with an overarching faith in market-driven private sector efficiency.
All evidence from modern successful economies points to the foundation of investment and productivity growth being the essential complementarity of public and private investment. If we are to build a competitive economy with a high rate of productivity growth underpinning rising living standards for all, Britain needs a new relationship between government and industry, to be consummated in the pursuit of a single dominant objective: investment, public and private.
Public-private complementarity is vital, and not just in the oft-cited examples of education, law and infrastructure. Life sciences, as we know, are the jewel in Britain’s crown, yet the UK’s share of global pharmaceutical research and development has halved since 2012. Why? Quite simply, an overwhelmed, demoralised health service has struggled to prioritise the clinical trials that are a crucial component of pharmaceutical development—a vital complementarity between public and private sectors.
For years, Britain has not had the level of investment it needs because our economic institutions, public and private, have not been up to the job. We have proved unable to capitalise on Britain’s undoubted strengths in artificial intelligence, the life sciences and our research universities. What is needed is a long-term government mission to create a new institutional environment, financial and corporate, that sustains the needed investment with ideas, skills and finance and, crucially, is supported by the confident prospect of future demand. Without the prospect of future demand, including export demand, there will be no investment, however good the projects and however abundant the finance or tax incentives might be.
Britain needs not just to catch up but to use our technological and research expertise to leap-frog our competitors in a world economy that has changed fundamentally since the pandemic. We knew already that the successful economies of the future will be those that secure the lead in green technologies. We also learned that national security will require safe supply chains and strong, home-based industries and services. The globalisation free-for-all is over.
The United States has got the message. President Biden’s Inflation Reduction Act and the CHIPS and Science Act chart a green and secure future. We start from so far behind that we need to do more than the US. At the moment we spend 1.2% of our GDP addressing the demands of climate change; the US spends 1.9%, France 2.5% and Germany more than 5%. Nothing could illustrate more that Britain needs a public/private industrial policy to build the green industries of the future.
I accept—it is well known—that defining a credible industrial policy is much more difficult than focusing on the broad sweep of macroeconomic objectives. Industrial policy consists of a broad range of diverse initiatives: an enhanced British Business Bank, reform of the energy sector, rejoining the Horizon programme, funds for further education colleges, new financial institutions to support SMEs, university industrial parks, a substantially revised trade policy and so on. It even includes investment in the NHS to maintain a fit labour force and support pharmaceutical trials. Crucially, we need a stable macroframework that provides a sustained growth of demand.
The necessary coherence of all this is achieved by focusing all these policies on the common investment objective, bound together by a sustained commitment to the common mission. We have not had that sort of policy for 13 years. I hope that when she sums up the Minister will tell us what the Government have learned from their litany of grievous economic errors. Britain cannot take any more economic blunders. I assure the House that just “holding our nerve” will not do the job. Our future economy needs new management, and it needs it now.