Sunak's Plan for Growth resembles a shopping list not a balanced prospectus

There were four themes to this week's budget: continuing Covid emergency support; short-term fiscal stimulus; measures to bring the government’s finances back to balance; and finally, a “Plan for Growth” to reorient the British economy for its post-Brexit, post-Covid future.  

The last of these is what this government’s agenda was meant to be all about just 12 months ago. You will know the tunes by now: Levelling Up, Britain as a Science Superpower, the pursuit of Net Zero, and Global Britain the trading powerhouse. Hence chancellor Rishi Sunak's closing peroration to “innovative, fast-growing businesses hiring local people into decent, well-paid, green jobs… people designing, manufacturing and exporting incredible new products and services”, somewhere far from the South East. Just 22 words that tick all his boxes.

Alas, slogans and rhetoric do not necessarily indicate a mature plan. Times columnist Rachel Sylvester has portrayed the budget as a chance to uncover the beliefs of the ‘real’ Rishi Sunak. ^[1] Noble, but it is easy to overstate the degree to which chancellor's actions are driven by ideology rather than the exigencies of the moment. Denis Healey didn’t go into politics to placate the IMF with spending cuts, nor Gordon Brown to nationalise banks. Even the seemingly austerity-obsessed George Osborne was once all about “sharing the proceeds of growth”. ^[2] To slip into a chess analogy, it is like asking whether a particular grandmaster likes moving his bishops or his knights; really, it depends on where all the other pieces are at the time.

For Sunak, the position is highly fluid, which makes consistent principle hard to discern. He faces not one but two pivotal moments: first moving from Covid support to economic stimulus, and then from fiscal help to retrenchment. For the first pivot, as I argued last April, coronavirus measures turn ordinary Treasury orthodoxy on its head, but only temporarily. Fiscal support morphs from payments to stay off work, or compensate companies for inactivity, into their direct opposite. So, does the chancellor think growth comes from generous government support and protection or from exposure to the market? It depends.

Then there is the agenda of fiscal consolidation, which tends to operate against the need to stimulate the economy. This can be seen in the realm of business investment; first, the “super deduction” provides a gigantic encouragement for capital investment out to 2023, and then an equally large rise in corporation tax serves to act in the exact opposite direction. The Office for Budget Responsibility concludes that business investment will shift forward in time, but end this parliament barely 7% above where it was at the beginning. So, does the chancellor think tax incentives to invest are of central importance, or not? Again, it depends – but has revealed a very unconservative inclination towards fiscal timing.

The government is making a massive bet on investment being the answer to growth and prosperity

I hoped for more consistency in the longer-term Plan for Growth. To simplify shamelessly, there appears to be a simple premise behind all of the government’s microeconomics: a belief in the ability of the state to achieve its desired economic outcomes by the force of its interventions, usually through investing. This is a government that thinks it can make towns more prosperous with Town Deals; boost innovation through investment in the science base; build new industries by carving out geographies with special privileges; and so forth. Symptomatic of this was the sheer number of ‘funds’ discussed in the Plan – I counted 17, with purposes spread from restoring high streets and helping carbon capture and storage to investing in skills, trams, towns or culture. And when not trumpeting a fund, the government uses other blatant methods to prod investment into the right places: an Infrastructure Bank, new rules to allow pension funds into riskier corners of the market, and that enormous super-deduction to encourage every investor in physical assets to hurry up and start spending.

If there is a theory behind all this, it is a massive bet on “investment, mostly physical”, being the answer to economic growth and prosperity – a viewpoint that could be lifted from the manifesto of any post-war social democrat party. As to whether it works, I think the chances are low, and the OBR is probably right to conclude that nothing the chancellor unveiled is reason to upgrade the UK’s longer term growth prospects.

There is a worrying combination of too many interventions, a wobbly strategy and a tight fiscal situation

First, there is the sheer number of different interventions. The higher the number, the more that the law of large numbers suggests that the result will turn out to be the average – and in the case of government intervention, that average is “not much”. It may even be worse, and destroy value. Each intervention has a transactional cost, and in many cases this government’s agenda is designed to go against the direction of the market – such as through trying to induce economic activity to situate in places it wasn’t minded to. In some cases, such as the Town Deals fund, there is some sign that the economic direction is dictated by politics, which will also tend to lower the return.

Second, the government is going through yet another wobble on industrial strategy, manifested in the decision to scrap the Industrial Strategy Commission. Wobbly strategic direction undermines those important areas where government-industry cooperation is needed. One of my arguments in How to Design an Industrial Strategy was that most of the real action in the economy comes from the private sector contribution that the government can elicit. Haphazard acts of generosity do not compensate for a constantly changing landscape.

Third, although the Plan for Growth looks full of funded goodies, a glance at the OBR documents shows that the overall fiscal situation remains tight. Departmental spending limits are now projected to be some £15bn below where they were expected to be before Covid-19 struck. Given the extra demands on the state incurred by the pandemic, such limits imply an exceptionally tough settlement for many of the budgets relevant for economic growth. Perhaps all the boosts announced visibly in the Plan for Growth will be positive for the economy, and the as-yet invisible cuts to follow will all be indifferent – but common-sense suggests that the most likely overall result is a wash.

The Plan for Growth needs to be more strategic and sectorally nuanced 

Finally, there is something remarkably archaic about the idea of growth stemming from a state-capital-led push for more physical investment. The UK is an 80% services economy, and its – mostly excellent – manufacturing sector cannot carry the whole. It is moreover likely to struggle with a diminished market and damaged supply chains, in the face of a Brexit harsher than many were expecting a year ago. This is a reminder that business investment is driven by much more than government tax policy. Other factors matter, such as the likely size of the market, the provision of essential factors like skills, the state of competition, the likely course of regulations, the risk of supply-chain disruptions, the provision of private sector finance, and much more. The failings that led to several years of business investment stagnation – post-financial crisis nerves, the impact of Brexit, and now the Covid-shock – are not straightforwardly ameliorated by slugs of government money.

My hope is that the cobbled-together quality of this Plan for Growth reflects the chaos of the moment, the rush that is typical of a budget. In the hopefully calmer times ahead, there is a chance for the more strategic, sectorally-nuanced style of the officials in BEIS to take over the task of implementation, and take a more considered approach to what boosts growth. The UK needs a broad, balanced investment prospectus. Thus far, it has more of a shopping list.