BRitin’s economy is at a turning point. Growth is slowing, the chances of a recession are increasing, inflation is at its highest level in 40 years and is expected to reach 11% this fall as the country goes through an earlier and more painful economic storm than most other countries.
That it was considered big news for the governor of the Bank of England to lay out these inconvenient home truths this week may have come as a surprise, given the regular trickle of economic pain that has sent consumer confidence to a low point since the 1970s. .
The important question, however, is how we respond. And therein lies a problem. For the government, it’s not so much a question of where Britain goes next, but what can be done to rescue Boris Johnson’s floundering leadership.
While much of the UK struggles with the rising cost of living, rival Conservative factions are pushing their own agendas. A growing laundry list of ideas has been thrown forward, often with conflicting demands: priority should be given to tax cuts, but money is needed for more military spending; the public sector needs to be cut, despite promises of leveling up, as well as more teachers, nurses and police. Last fall, Johnson wanted a high-wage economy, now he warns of bigger wage increases.
All this points to the lack of a cohesive economic plan, which in normal times is bad enough for a government, but in the midst of the biggest blow to living standards since the 1950s is a dangerous abdication of responsibility.
Johnson and Chancellor Rishi Sunak are expected to relaunch their economic policies in a joint address this month. Following the announcement of £37bn in financial support for households this year, the focus is likely to be on the long-term plan to tackle the cost of living tightness.
High on the list should be plans to insulate homes, invest in reliable green energy and get the UK economy back on track through productivity gains, the latter of which is vital to raising living standards in the long term and could help the country escape continued higher rates of inflation.
The problem is that there is little evidence among conservatives of success in improving productivity over the past decade.
Any gains have lagged other leading economies, exacerbating the greatest regional divisions in Europe.
According to the National Institute of Economic Social Research, maintaining Britain’s productivity growth before the 2008 financial crash would have yielded an additional £5,000 per worker per year. Meanwhile, London is further removed from the rest of the country, pointing to deep structural problems, with productivity 50% above the national average, compared to 40% in 2002, according to the Resolution Foundation.
All of this is testament to a wasted decade of austerity that has made our predicament more painful to the stomach and harder to escape.
Well-targeted investments are essential to escape the inflation trap and increase productivity. The good news is that Sunak sees this and uses his Mais lecture at London’s Bayes Business School to outline his ideas for investing in “capital, people and ideas,” three things economists agree would help. . It remains unclear where this investment will come from and how exactly it is intended.
Sunak’s preference is to use private sector power – offering tax breaks to companies to invest in productivity-enhancing projects. He is expected to announce plans to build on his £29bn “super deduction” scheme launched last year, which will give companies 130% off their tax bills for qualifying investments until April 2023.
The Treasury last week finalized a consultation looking at ways to replace the scheme, including the option to pay off investments in full. This would allow companies to deduct the full cost of qualifying expenses from their tax bill and would cost the Treasury £11 billion in lost revenue.
Sunak would rather wait until the fall budget to map out his plan, but will likely come under pressure to announce anything in the joint speech with Johnson. Business leaders know this and lobby hard.
Allowing such a tax break would have to be carefully monitored to avoid abuse of the system and the likelihood of the government supporting questionable business priorities. However, after a decade of failure to increase business investment, thinking changes are needed.
Unlike its predecessors, Sunak believes that simply lowering the nominal corporate tax rate to encourage investment does not work. Despite the corporate tax cut from 28% in 2010 to 19% today, business investment has barely progressed and the Treasury has lost billions in revenue.
Under Sunak, the plan is to raise the corporate tax rate to 25% next spring while offering investment credits to companies, in a carrot-and-stick approach to boost investment.
Holding on to this position could be challenging as parts of the Tory party push for a dramatic corporate tax cut in an effort to restore favor to business leaders while preventing the overall tax burden from rising to the highest levels. since Clement Attlee was Prime Minister.
However, companies understand the Chancellor’s approach and are instead looking for a generous package of investment deductions.
Providing an incentive to invest is only part of the picture. Despite the super discount last year, concerns about the pandemic, Brexit, rising costs, supply chain disruption and chronic staff shortages have weighed heavily on companies’ investment plans.
Official figures show that business investment fell again in the first quarter of this year, while the overall level remains 10% below pre-pandemic levels.
To put serious firepower behind a plan to boost productivity, the government must show that the state is willing to invest too. A coherent economic plan, including support for businesses and households, would help Britain escape our inflation-ridden, slow-growing economic slump.