David Willetts is President of the Resolution Foundation.
Rachel Reeves tried yesterday to shift the agenda back to the prospects for getting growth going. That is indeed the most important challenge for this Government, just as it was for the last one.
It may sound optimistic to talk about growth as distinct from the miserable business of balancing the books. But raising the growth rate of a mature democracy with lots of well-organised lobby groups is not easy; it involves winning some difficult battles.
The challenge Labour have set themselves is to raise Britain’s growth rate to the highest in the G7. At the moment we are in the middle of the pack at about one per cent per head per year GDP growth – any higher figures which suggest we are doing better than that are driven by population growth, not performance per head.
(It would be great if every politician who says they want to bring down immigration also pledged to use every economic statistic on a per head basis, rather than trying also to use immigration to boost their apparent economic performance.)
The best performer in the G7 on growth of GDP per head is the US on 1.5 per cent per annum. So Labour have to raise our underlying growth rate by 0.5 percentage points. That is not easy, but nor is it impossible – provided they are willing to take some very tough decisions.
The first step is to recognise there is no gain from any attempt at Keynesian demand stimulus. The OBR and the Bank of England assess that we are operating at about the productive capacity of the economy as currently configured. Putting more money into the economy risks just causing inflation. The only way to get growth is supply-side reform.
Top of the list is housing. Labour are right to focus on this – we don’t have enough houses in the right places, where people can work with maximum economic impact.
Just building more houses on its own brings no immediate benefits as there is little spare capacity in construction – activity has to move into housebuilding from doing something else.
However, if the houses are then built, there is a flow of benefits to the people who live in them – and they can boost economic performance if they are put in the places where greater agglomeration makes people more productive.
But here it looks as if Labour have made a serious mistake – though it is not too late to correct it. Their measure of where houses should be built is simply the ratio of incomes to house prices in the area. That means that low-income areas with expensive second homes are to get a lot more housing – places like Cornwall or Norfolk.
But they are not where the big growth gains are. That depends on boosting the economic performance of our twin second cities: Birmingham and Manchester.
In these places however (especially in Birmingham) house prices are quite low at the moment, so it doesn’t get much extra housing on Angela Rayner’s model, even though it really needs more housing to create a bigger travel-to-work area. Labour’s housing priorities need to be shifted so they are based on maximising the growth benefit of housebuilding.
We also need a lot more investment in capital infrastructure, from water supply to transport links. Here the problem is not so much shortage of capital. It is unreliable chopping and changing of public priorities (see the sad story of HS2).
It is also the sheer expense and difficulty of getting stuff built; I’m increasingly impressed by the work of Britain Remade who show what needs to be done.
We estimate at Resolution Foundation that bold polices to promote housing in the right places, together with more capital investment in infrastructure, could add about 0.25 percentage points to growth. That would take us half-way to catching up with the US.
Not bad. But then we need other forms of investment too. In skills, for example; there has been a significant decline in the number of days of training per year for the average employee. Breaking down trade barriers both with the EU and across the world could have a big effect too.
There is no single silver bullet that gets us to American performance. But it is just possible to imagine a combination of policies that gets us there.
That also depends on no negatives on the ledger either. As she approaches her Autumn Statement the Chancellor should remember that wise Hippocratic principle – first, do no harm.