Lord Willetts is President of the Resolution Foundation. He is a former Minister for Universities and Science.
At last we are talking about the shockingly poor performance of the British economy since the financial crash. We are lagging behind our competitors and need to raise our game. That is the brutally honest and refreshing argument which drives the Government’s Growth Plan.
It is an analysis which would have been shared by Edward Heath and Margaret Thatcher. They were both, in their different ways, restless reformers trying to move the country forward after periods which they saw as lacking dynamism. Our own Resolution Foundation analysis for our Economic Inquiry shows that Britain has become a low mobility economy held back by lower rates of job moves and lower rates of corporate activity shifting from to high growth sectors.
The belief in the market as the best way to dynamise the economy is more Thatcher than Heath. But the insouciance about public spending and borrowing is closer to Heath than Thatcher. This is what spooks the markets. Here, the so-called Treasury orthodoxy is really just a warning that there are limits to how much you can borrow and what you can borrow for. It is hard to predict in advance where that limit will be reached but we are testing it now. You cannot buck the markets.
However, there is another dimension to Treasury orthodoxy where I have more sympathy with Kwasi Kwarteng and Liz Truss. It has just become so hard for Ministers outside the Treasury to do anything even if it is to boost the supply side of the economy. Every decision is slower and more cumbersome. Liz Truss’s twelve years in Government may have been key in shaping her approach today– after years of wading through treacle she is now impatient to get stuff done. And here Treasury orthodoxy is a real barrier.
For a start, onerous public spending negotiations which reach an agreed conclusion are rarely the end of the matter and often mean very little. Many specific allocations then have to be further cleared with the Treasury, which is an opportunity to reopen decisions which departments thought were agreed.
This scrutiny increasingly involves increasingly complex and bureaucratic business case assessments. Each absorbs large amounts of civil service work and yet can obscure the key strategic point behind the proposal. They can take over a year – and when spending settlements were only for one year, it became very difficult to get anything through in time to do it. For some Whitehall cognoscenti, the most exciting sentence in the Chancellor’s Statement was “we will review the Government’s business case process to speed up decision-taking”.
Then public money is allocated in small highly specified amounts. The Treasury picture of good housekeeping is a row of jam jars on the mantlepiece each to cover one household bill with no capacity to run the family budget as a totality. The Treasury announces funding for initiatives for productivity or infrastructure, but does not trust other departments to spend it, so it is put it into a separate Treasury pot with its own rules and time-scale. That makes it hard to combine with any other part of public spending or do deals with the private sector to help them invest alongside.
This is where the Treasury is one of the biggest obstacles to speed, efficiency and innovation. But Number Ten can also be part of the problem. The control of very announcement on the Grid has become so strict that even when a Minister has taken a decision, however modest, actually announcing it requires intense negotiation with Downing Street politicos who control every announcement. I suspect the shrinkage of Number Ten staff is an attempt to cut back on all this palaver.
Behind all this is a general aversion to risk. I think government should be wary of macro-economic risk. But it is a legitimate role of Government to be a bearer of some micro-economic risks which are too great for any one private enterprise. That is how Americans – including many Republicans – use Government to boost innovation and growth. Federal agencies take much of the risk from innovative new products and services with grant funding and early procurement. Elon Musk alone has received more money from the federal government than all British public funding for innovation.
The most vivid example of this issue at the moment is the row over the Governments support for the private sector during Covid. What lesson do we learn? Is it that Kate Bingham took risks and triumphantly succeeded – knowing of course what she was doing? Or is the lesson that Theo Agnew was right in his unhappiness that in the rush to get money out to business, some fraudulent claims got through? The Treasury is caught in the middle, but I hope they can see that Bingham’s approach was right. Ministers should be encouraged to act in that spirit.
This also means scrutinising regulation. Entrepreneurs have many stories of how difficult it can be to run a business in Britain today. It can be shockingly hard to open a new company bank account. The regulation of mortgage lending is so demanding that it has become a barrier to access to the housing market. The regulatory burdens on public listed companies are now so great that they are vulnerable to well-funded corporate predators who promise to liberate them by taking them private.
Many of last week’s announcements were somewhere between a policy and an outburst of total frustration with the barriers that doers – inside Government or out – now face. The Treasury are right to worry about the macro-economic risks. But a willingness to take micro-economic risk is key to success in boosting growth.