Giles Wilkes goes in search of a growth strategy in the chancellor’s budget, and finds a plan lacking in radicalism but one which takes many small, difficult and sensible steps.
Having seen a fair few in my time, I have decided that there are three lenses through which one can see the budget when it comes to uncovering the government’s growth strategy.
The first looks only upon the stuff the chancellor announced on the day. A second gazes instead upon all the missing pieces: every policy idea the commentators have called for, which might have made a difference had the chancellor only possessed the commentator’s courage or insight. The third lens looks upon the much larger quantity of past policies already being enacted, but little discussed on budget day because to do so is extremely tedious. If you need an image, picture an iceberg with a tiny protuberance of budget-day talking points above the surface, and large mass of what is already there below.
But what really matters for immediate relevance is what the Office for Budget Responsibility thinks, which ultimately determines what the government can assume about growth over a five-year horizon, which in turn determines what it can do. To contemplate this part demands heroic levels of Stoicism, because the OBR analysis is a remorseless reminder of the size of the growth challenge. How puny are the measures of the chancellor when set against the sheer quantity of what is already there: the £4.5trn of capital, the 32 million already working, our countless laws, customs, rules and regulations, and Britain’s relatively small position in a largely indifferent global economy. Very little moves the dial. Using this lens, the UK’s growth model, once the budget dust has settled, is pretty much what it was before.
Jeremy Hunt should be applauded for shifting the dial on growth
Was Jeremy Hunt's budget any different? We should start with credit where it is due. The biggest immediate challenges for growth policy are to boost the UK’s effective labour supply, which has fallen by half a million since the pandemic, and to improve investment incentives ahead of a sharp rise in corporate tax rates and concurrent expiry of the Super Deduction tax allowance. Looking through the first lens, Hunt has acted on both, committing £7bn to a slew of measures on labour supply – notably, childcare support but also changes to welfare and back-to-work policies – and roughly £8bn a year to the full-expensing of capital expenditure, for three years.
In response the OBR made its largest-ever upward revision to potential output that can be credited to government decisions on the day – a fifth of a percentage point of GDP. No chancellor since 2010 has ever actually raised potential GDP by that much. That is not because the OBR has proven too miserly; if anything, it has been too generous in the past, given a decade of forecast productivity recoveries that have subsequently failed to materialise. Unfortunately, however, the entirety of this upgrade reflects the small (110,000) forecast rise in the future labour force – worthwhile, but not even as much as a quite fortuitous projected rise in net immigration that was also factored into the OBR’s latest forecast. The OBR gives no growth marks to the expensive raising of capital allowances, because the measure is temporary, for now. A great many voices are calling for full-expensing to become permanent, which is the chancellor’s aspiration, but one that butts up against his need to forecast a falling debt-ratio at the five-year horizon.
Nevertheless, for shifting the dial at all the chancellor should be applauded, even though his measures are expensive for the results they achieve. The small total effect – 0.2 percentage points of GDP is about a twentieth of the impact of Brexit (4.0% in the opposite direction) – is simply a reminder of how hard it is to transform the performance of a large, mature economy.
Hunt needs to build on the Windsor Framework and restore broken trade links
The Brexit impact – anyone who has met a small business caught in a net of post-Brexit export bureaucracy will have little hesitation in accepting the OBR’s figure – leads naturally to the second lens: what element of growth strategy was missing from the budget? After the prime minister’s recent success with the Windsor Agreement, a future priority for growth policy should be repeating the same emollient diplomacy and attention to detail to the entire field of UK-EU trading relations. This includes a hard look at the Retained EU Law Bill, which causes uncertainty and damages confidence by threatening to tear up thousands of statutory instruments that have an origin in EU law.
A growth strategy also requires the UK to pick its targets. Critics say the budget lacks any kind of a response to the US government’s Inflation Reduction Act, which provides hundreds of billions of dollars for green, climate-friendly technology, while other Acts provide support for key industries like semi-conductors. It may not be feasible for the UK to become a large player in semi-conductor production, however, and instead Hunt made some progress by committing to a 10-year, £2.5bn plan to support quantum technology
UK to invest £2.5bn in quantum computing drive, FT
, £20bn for carbon capture, use and storage, and a new regulatory approach to support of the life sciences and digital technology, through the review led by Sir Patrick Vallance. The funding in question reflects the allocation of existing budgets, not new money – but that should not be construed as a criticism. The government’s longstanding plan to raise R&D spending is now at the follow-through stage, which requires these kinds of longer-term frameworks so that business and academia can plan with some confidence. It is also welcome that the government announced another five-year, £8.8bn round of the City Region Sustainable Transport Settlements – funds that should help urban areas outside the Southeast to plan and deliver better intra-city transport. Further development of the devolution deals for Greater Manchester and West Midlands mayoral authorities should be applauded for the same reason – greater certainty and a shift towards trusting lower levels of government to discern what is right for their area.
Trailblazer devolution deals
These are all examples of how the third lens – the existing policy set – is still where one sees most of the government’s growth plan. As we argued when Rishi Sunak first became prime minister 15 Early questions for Sunak’s growth policy , much of his growth agenda should be pursued through continuation of policies from the Johnson era and before, such as the boost in R&D and extensive support for adult learning outside of higher education. That the chancellor didn’t mention many of these is not a worrying sign – they are simply proceeding outside of the glare of budget publicity.
Hunt’s growth plan may not be radical, but it represents a step forward
Hunt ended his budget peroration with “We stick to the plan because the plan is working”. By this he was referring to the prime minister’s somewhat modest set of five priorities 16 “Rishi Sunak's five promises analysed”, BBC, 4 January 2023 , and its ambition to grow the economy. In truth, his plan on this front is much the same as most chancellors’: try to raise investment and employment, manage economic demand responsibly, and take steps to boost skills and innovation. The lack of radicalism may appal followers of former prime minister Liz Truss, who imagined growth is something that can be unleashed with one bold stroke. But the great majority of his fellow MPs appear to accept the duller truth. Improving growth is a matter of many small, difficult steps, and is better when it builds on policies in train rather than continually reinventing the approach. On Wednesday, Jeremy Hunt took a couple of steps forward. It is not a bad start.