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Jeremy Hunt’s search for an elusive growth strategy

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In his Autumn Statement speech on Wednesday Jeremy Hunt, chancellor of the exchequer, stated that he proposed “110 growth measures — don’t worry, I’m not going to go through them all”. I am not going to go through them all either. Fortunately, the Office for Budget Responsibility has done so and come out sceptical: it has lowered its estimate of the medium-term potential rate of growth of the economy to 1.6 per cent, down from a previous estimate of 1.8 per cent, despite Hunt’s reforms. That is not because the measures are all bad. Some of them — notably permanent expensing of investment — are rather good. The problem is rather that it is hard to accelerate growth. No magic wands exist.

Being a good Conservative, the chancellor rejects “big government, high spending and high tax because we know that leads to less growth, not more”. Even this is not as obvious as he believes. According to the IMF, between 2010 and 2023, average real GDP per head rose by 20 per cent in Denmark. This is double the increase in the UK. Yet the average ratio of tax revenue to GDP in Denmark was 53 per cent against 37 per cent in the UK. In 2023, Denmark’s real GDP per head was close to a third higher than the UK’s: it is possible for a country to prosper with high taxes.

The first thing a government interested in raising the growth rate would try to do is raise the investment rate. This is particularly important for the UK, where investment in physical capital is very low by the standards of its peers. Between 2010 and 2023, the UK’s gross investment will average close to 17 per cent of GDP. That is below the rate in all other significant high-income countries. US gross investment averaged 21 per cent of GDP, for example.

For this reason, the expensing of investment makes sense, because it should increase the incentive to invest. But even here, there are complexities. Isaac Delestre of the Institute for Fiscal Studies notes that the new policy interacts with the tax deductibility of interest to create a huge subsidy for debt-financed investments. This shows how specific reforms must be set in the context of the tax system as a whole. Alas, the OBR also judges that “The switch from temporary to permanent full expensing . . . increases potential output by 0.1 per cent in 2028-29 and just under 0.2 per cent in the long run.”

A second consideration is savings. The UK has a very savings-short economy: on average, gross national savings were 14 per cent of GDP between 2010 and 2023. Suppose it had invested at US levels. Then it would have needed to attract some 7 per cent of GDP in foreign savings. This would have been expensive, difficult and risky.

A third aspect in a growth strategy is accelerating innovation. The chancellor is aware of this. But it is hard to shape the consistent and stable policies needed to promote it in a political and policy environment driven by the desire for headlines after the UK’s extraordinary number of fiscal events.

The fiscal timetable of our governments simply does not match the timetable needed for long-term decision-making. One of the investment-inhibiting consequences of this is uncertainty. The chancellor has, after all, introduced 110 “growth measures” just this time. How many more will come in the Budget early next year and Autumn Statements and Budgets thereafter?

This is an environment almost perfectly designed to make business risk-averse and defensive. Adverse changes in British capital markets, partly related to the complex regulatory mess made of the pension system, have reinforced this tendency. The chancellor understands this. But he finds it hard to change things radically. He is trapped.

None of this is inevitable. As Martin Sandbu has recently noted, other countries do not do things in such a complex way. An alternative would be to make budgets far rarer events, designed to establish the fundamental fiscal plan for a parliament. Then the focus nearly all of the time should be on strategic goals, such as investment, saving and innovation.

The government should set out a long-term vision of where it thinks the economy is and should be going. It should focus on long-term reforms, such as tax reform and the energy strategy. It should also focus on reforms of the institutions of government, such as those put forward by Francis Maude.

If the UK is to escape the low growth and austerity trap in which the country has been stuck since the financial crisis, the next government will have to make big changes. These must start with how it makes policy. Neither endless fiddling nor ill-considered leaps into the unknown, such as Brexit, work. The way things are done has to change. Politics is performative. Good policy is not.

martin.wolf@ft.com

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