David Willetts is President of the Resolution Foundation.
Tomorrow’s Autumn Statement is going to be particularly significant: it is going to shape the economic battleground of the next election.
In his first year as Chancellor, Jeremy Hunt was focussed on restoring stability and credibility to economic policy, and has made great progress. Inflation has now clearly fallen and it looks as if interest rates have probably peaked. Most of the pay disputes of last year are behind us.
Moreover, that high inflation has, ironically, helped rebuild the public finances by boosting the tax take as wages rise, in money terms at least, while also making things very difficult for public services with real cuts in their budgets. If reports are correct, the Chancellor has more than £25 billion in room against his commitment to get debt falling as a share of the economy in five years’ time.
There is an argument that much of that extra room should be banked, rather than spent, to give him room to deal with future shocks. But, with a much more solid base than a year ago, there could also be more space for a bolder economic strategy.
Britain’s economy has still not recovered its mojo after the shocks of the financial crisis and Brexit. The most vivid evidence of the problem is our low rates of investment, both public and private. Full expensing of capital investment is a powerful tool to incentivise new investment, and should indeed be a priority. It would be great if it could be matched by a boost to the public investment, as proposed by the Infrastructure Commission.
Hunt’s main fiscal rule is to bring down the national debt as a share of the economy. That makes sense, but won’t do it on its own because it fails to capture the value of accruing assets. So he could also go for a rule that he balances the budget on current spending and only borrows for capital investment.
Fiscal drag may mean he is collecting so much extra tax he can afford to give some of it back. If he has any capacity after easing business taxes, it would be good to cut employee national insurance. This is a tax on earnings and cutting it should be a much higher priority than Inheritance Tax.
The value of household wealth has risen to seven times national income without any increase in taxes on it. The tax increases have almost entirely been on incomes. It does not make sense to ease up on capital which is already lightly taxed when the heaviest burdens fall on people who work.
There is more to promoting growth than tax cuts. The Chancellor understands that. Indeed, I hope and expect there will be good meaty agenda in the Autumn Statement boosting Britain’s capacity to innovate. Our universities are a great source of new discoveries and start-ups to exploit them.
But sometimes they are so nervous of criticism for missing out, if a start-up thrives and they only have a small stake in it, that they try to hold on to too big a stake. There is an opportunity for the Treasury to signal that the real benefits for Britain comes from a flow of these companies out into the market: it is not to be measured by exactly how many pounds a university gets from each successful start-up.
Innovation does of course move fast; it would be great if Hunt committed to agility, as well as stability. Too many government processes slow up investment.
The creation of a new department specifically for science and innovation is a great opportunity to free innovation from Treasury controls designed for assessing how to build a bypass, not for the inherently risky business of backing technologies and innovations. These processes are so slow that is it hard for the Government to do deals with the private sector to promote investment in innovation, as its timetable is so slow and cumbersome compared with business.
The biggest change in research and technology policy over the past ten years has been the new focus on the security angle. It is in many ways a welcome development; the security agencies finally killed the old Treasury doctrine that Governments couldn’t possibly know anything about the significance of any particular technology.
But it has also meant that decisions on technologies are held up whilst national requirements are assessed as if it is an item of defence spending. There is a case for seizing the opportunity of leveraging a meaty proposal of private business investment – without having to assess how it fits into a framework intended for security-sensitive projects.
We do have great comparative advantages not just as a centre of innovation. We are a services superpower second only to the US. That doesn’t just mean banking, but also the creative industries, legal services, architecture and consultant engineering.
It also certainly includes education, and that is not only overseas students (valuable though they are) but also the global recognition of our qualifications and exams and, of course, teaching the English language. Just a hint of optimism about all this is what we need tomorrow.