Tom Clougherty is research director at the Centre for Policy Studies.
In the weeks since September’s disastrous mini-Budget, plenty of people have claimed that the pro-growth mission which animated the Truss government is dead in the water, its policy ideas tarnished for a generation. In my view that argument is both wrong and a trap for Conservatives.
First, let’s be clear about the hard lessons of the Truss experiment. It was a mistake to fund broad-based tax cuts through increased borrowing, without any immediately apparent plan to make the books balance in the medium term. No government is going to try that one again in a hurry.
It was also a mistake to take a self-consciously confrontational approach to economic reform. Efforts to overturn prevailing orthodoxy need years of planning and groundwork, validated by a general election victory. If Margaret Thatcher or Clement Attlee had tried to spring their radicalism on an unsuspecting public and political class mid-term, they probably would have failed too.
Acknowledging those errors does not mean, however, that genuine pro-growth policies are wrong or unimportant – or that it makes political sense to steer away from them. For one thing, the Truss government never actually got to the most promising bits of its agenda – those non-fiscal, ‘supply-side’ reforms that could have made a real difference. So it is hard to argue that they have been tried and found wanting.
More to the point, Labour plainly don’t think that growth is a losing issue. Keir Starmer and Rachel Reeves talk about growth constantly, are enthusiastically courting business, and would like nothing more than for the Conservatives to let themselves become the party of economic stagnation and managed decline. A political party that cannot offer voters a better future is going to run out of road pretty damn fast.
So, yes, a Conservative government still needs a growth agenda. And while it is vital that such an agenda is realistic – neither the public nor the financial markets are in the mood for fairytales – we should not mistake defeatism for realism.
Of course it is hard to sustainably boost growth; of course we face strong headwinds, both short term (inflation, recession) and long term (an ageing population); and of course success is more likely to come from the steady accumulation of marginal gains than from any silver bullet.
But the fact remains that on a GDP per capita basis, we are a fifth poorer than Germany and almost a third poorer than the United States. So we don’t need to blast through any new economic frontiers – we just need to understand what we do badly, what others do better, and work out how we can catch up.
Once you start thinking about our economic performance in those terms, there are a few things that immediately come to mind.
One big issue (economically and politically) is that apart from London, British cities do not seem to benefit from productivity-boosting agglomeration effects. In other countries, there are strong returns to scale, but in the UK, if you ignore London, our cities get poorer the bigger they are.
Long-term investment in transport infrastructure is probably a big part of the problem: our second-tier cities might be big, but they’re not very well-connected. While more public investment is part of the answer, it needs to be well-targeted. Intracity connections tend to be more economically important than intercity ones – so we shouldn’t expect HS2 to really move the needle in Birmingham or Manchester.
A related problem is that some of our smaller cities could be real engines of growth – if only we would allow them to grow. Oxford and Cambridge are obvious examples: world-leading research centres with massive unmet demand for lab space. Britain talks a big game on biotech and life sciences, but industry figures suggest Boston is adding about 20 times as much lab space as Oxford and Cambridge (combined) per year. This is one example of the way we are squandering profitable comparative advantages and preventing the creation of thousands of high-skilled and high-paid jobs.
Then there’s housing. Researchers in the US have found housing supply constraints in high-productivity urban areas reduced growth by 36 per cent in the 45 years to 2009 and (separately) that relaxing planning rules in the three most productive cities could boost the economy by eight per cent in real terms. These are huge numbers and would likely be even bigger in the UK – because no other large economy has a land use planning system as restrictive, discretionary, and bureaucratic as ours.
To pull these threads together: going for growth in any meaningful way must mean letting London densify, letting Oxford and Cambridge expand, and giving other city regions the infrastructure and internal connectivity they need to benefit from real agglomeration effects.
Two key themes, planning and infrastructure investment, come together in the case of energy. Over the past year, we have been made much poorer by an external energy shock. There’s not much we can do about the past now, but we can avoid seeing history repeat itself if we finally get serious about our domestic energy supply. We shouldn’t just be pursuing security – the goal should be to generate cheap, clean, and abundant energy for future generations. That means more nuclear power, more onshore wind, more solar farms – and, crucially, more pylons to carry the energy they produce across the country.
Even more than for transport, money isn’t really the issue here – as with housing, it is our planning system, our addiction to ‘consultation’, and our ever-burgeoning environmental bureaucracy that is holding development back. (See this excellent piece by Britain Remade’s Sam Dumitriu for more.) Cutting through this Gordian knot is essential if growth is our goal.
Given the political sensitivities here, the most promising avenues for reform are those that try to engineer win-wins, for example by using some of the economic gains on offer to buy off traditional opposition. Thus, for instance, street votes could let existing homeowners greatly increase the value of their homes and benefit financially from urban and suburban densification – if they voted for it. Similar market-based ‘carrots’ could be devised for communities that opt to allow wind, solar, or nuclear development nearby.
There are other potential pro-growth reforms I could point to. We have a longstanding problem with business investment, for example. Not coincidentally, we tax profits and business property is a way that is almost uniquely stacked against corporate capital investment by OECD standards. More broadly, our tax system raises money in a particularly inefficient way. Fixing that could boost growth without hitting revenue, but it needs to be done in a comprehensive and thought-through way. Britain’s piecemeal, Budget-by-Budget approach makes for great political theatre, but is a lousy way to make good tax policy.
Regulation is important, too. From childcare to capital markets (and everywhere in between), Britain is choking on red tape. Our departure from the EU should be a spur for long-overdue reform, even as we seek to have the smoothest possible trading relationship with our former partners. Finally, while skills and R&D both deserve more than a one-line assessment, it’s obviously crucial that we find ways to improve the economic return on money we already spend (or plan to spend).
The other day, someone asked me what I really meant by growth. And that’s a great question, because while it is easy to go on about economic statistics, none of them properly capture why growth matters so much, or explain why it should be a central focus of our politics. So here’s what I’m talking about: more disposable income and higher living standards. A better future for our children, and then our children’s children. Abundance over scarcity. Progress instead of decline. Optimism rather than pessimism. That is surely an agenda every self-respecting Tory should be happy to get behind.