Jeremy Hunt’s growth plan mixes welcome realism with speculative cakeism

The chancellor Jeremy Hunt got much right in last Friday’s speech about growth, above all the optimism. For all the shocks, headwinds and self-inflicted injuries that buffet the UK, it is still an advanced economy with some remarkable strengths, towards whose shores hundreds of thousands of people travel annually in pursuit of opportunity. In many regards it is still the same country as the one that just 15 years ago was able to grow 2.5% in a normal year. Plug that kind of growth into the spreadsheets of the Office for Budget Responsibility, and many of the government’s medium-term problems melt away.

Jeremy Hunt’s avowed optimism serves more than one purpose. His primary task as chancellor – appointed during the eyeblink disaster spell of Liz Truss’s time in Number 10 – was to stabilise a financial and economic situation spiralling out of control. This he has largely achieved, albeit with a plan full of details-to-follow spending cuts that may be hard to deliver. But this has left the government with an almost entirely negative definition. Trailing Labour by 20 points in the polls, the Conservative government needs a positive narrative if it is to tread what its most influential strategist calls a “narrow path” to victory. ¹⁵ Parker G and Cameron-Chileshe J, Tories told to focus on ‘narrow path’ to election victory, Financial Times, 26 January 2023, www.ft.com/content/63682089-9d1a-4419-ae14-fa966370ee34  

Tax cut advocates have a very short memory

Hunt was also right in his stern rejection of tax cuts as the means of delivering that optimism. ¹⁶ Parker G and Thomas D, Jeremy Hunt to defy rightwing Tory MPs by rejecting calls for Budget tax cuts”, Financial Times, 26 January 2023, www.ft.com/content/1377df71-4f36-49b3-9467-2ed5ee0a9a49 It is quite staggering that, just four months after September’s mini budget caused a bond market meltdown, the same siren voices from the right still sing the same stale tune. Not only did the markets make vivid the financial risks of unfunded tax cuts, but the political reaction was hardly what the government needed either. After a decade of austerity and a winter of strikes and healthcare crises, the public is rightly sceptical of ideas that depend upon unidentified fiscal savings, or a miracle rebound in growth. The chancellor is clear that lower taxes are for the future, once the fiscal conditions for affording them have been achieved. And boosting the country’s long-term sustainable growth rate is the work of years, not one thunderous fiscal statement.

The E’s reflect the evidence, but lack policy substance

Unfortunately, Hunt’s schema for growth – the four E’s – is more of an aide-memoire than a vision. Start with Enterprise. Every chancellor since the dawn of the Internet has extolled the transformative power of start-up culture and entrepreneurialism, and most of them have added to a buffet of tax breaks and other encouragements in support of it. Hunt did not put much more on the table. There was a call for a more positive attitude to risk-taking, a review to find Brexit regulatory benefits for five growth sectors, and the oft-heard claim that reforms to Solvency II rules will flood the country with venture capital. The last ambition is seen with some scepticism in the pensions industry, recently given such a sharp lesson in the need for caution when investing.

Education and Employment are both areas where the government has something to boast of from the last 12 years’ efforts; Britain has climbed the PISA rankings for educational outcomes, and until recently its economy was buoyed by a phenomenal record at growing the labour force. But, again, this speech said little beyond how important these E’s are. Then there is “Everywhere”, which stands in for levelling up. It is, according to some, becoming less fashionable as a phrase. ¹⁹ Scott G, Levelling up is so 2019... Rishi Sunak’s Tories are now gauging up”, The Times, 18 January 2023, www.thetimes.co.uk/article/end-levelling-up-phrase-tory-mps-rishi-sunak-2023-9nj537ghk Under this ‘E’ there were some noteworthy commitments. The chancellor continues to back High Speed 2, which is significant considering how post-pandemic travel patterns have played havoc with railway business plans. He also expressed a determination to push ahead with more fiscal devolution, and to launch investment zones for each of five chosen growth industries in lagging regions.

There are merits in the chancellor’s four E’s. They reflect a good, evidenced view of where better performance might make a difference, and are better than mere slogans. Of course, it is wearying for business to have a new mnemonic to learn, to add to People, Capital and Ideas (Rishi Sunak’s framework), five high-growth sectors, seven technology families, four Grand Challenges and five Foundations (from Theresa May’s time). ²⁰ The lack of Energy as a fifth E is also a surprise, but maybe unnecessary, since a push for more clean energy has been a feature of every government’s agenda for a decade Clear communication is an instrument in growth policy –the heavy-lifting is carried out by the private sector responding to government signals, and it matters that the signals are clear. 

This confusion stems from four years of political churn. Our system of government is good at announcing new policies and frameworks but is less efficient at maintaining continuity and focus. It would have been good if Hunt had put a little more of an effort into highlighting and supporting the considerable body of work already under way – the reform of further education, the giant to-do list that is the Levelling Up White Paper, the shift in the emphasis of the corporate tax system – and a bit less on new invention. 

Backing excellence and supporting laggards can be in conflict

There is also a possible inconsistency in where the chancellor’s emphasis on growth policy sits. By devising support around five high-growth sectors, he appears to belong to the camp that might be called “Backing Excellence”. This argues that growth is best supported by boosting what the UK already does best – the trillion-dollar ecosystem of digital economy “unicorns” ²³ “Unicorn” means a private company valued at over a billion dollars; the “trillion dollar” claim – made by DCMS Secretary of State Michelle Donelan in a speech before the chancellor’s – is that the UK digital sector has a valuation above that figure , world-leading life sciences, the occasionally troublesome financial sector, and so on. Members of this camp need to explain how the UK’s overall productivity performance has been so poor, despite consistently doing well in these excellent niches. The other camp, “Supporting Laggards”, is the essence of the levelling up agenda. If the UK were only its south-east corner, its problems would not so be much weak productivity as congestion and thwarted growth in places like Oxford, Cambridge and London. 

Jeremy Hunt’s plan to square the circle risks epitomising the sort of ‘cake-ism’ that this more grown-up, post-Johnson government is meant to reject. Using investment zones to build clusters themed around growth sectors is highly speculative, to put it kindly. So many places have aspired to be Silicon Somewhere that there is a Wikipedia page listing them. A page listing the successes would be very much shorter. This is not to condemn sector policy, but a warning against expecting it to do too much at once, in particular the work of regional rebalancing. 

This is another area where new invention is not required. There is reasonable evidence for what might help with levelling up, which the Institute has examined and published (see What levelling up policies will drive economic change? from July last year ). Focusing on second-tier cities and adult skills would have a greater impact than speculatively founding new clusters. 

Our work at the Institute for Government finds that you cannot build a good growth policy solely out of a focus on the ‘right’ sectors in any case. Universal policy across the economy plays a larger role. Therefore, Jeremy Hunt needs to provide meatier and more difficult substance in his E’s, beyond a declaration of how important they are. For example, under ‘Enterprise’, there is evidence that the UK’s high VAT threshold acts as a barrier to growth. Proper tax reform here might shift incentives towards company expansion rather than creation – but the chancellor that embarked on this would need the courage to face down the small business lobby. ²⁴ McDougall M, Worsening VAT registration cliff edge prompts calls for UK reform”, Financial Times, 26 January, www.ft.com/content/618bfe59-a1f9-4fc1-b128-acb564eacfe3  He should not allow regional policy to be only about the lagging regions, either. Few countries anywhere enjoy such concentrated excellence as can be found in Oxford and Cambridge. The UK is not so spoiled for growth opportunities that it can stifle their expansion without paying a price. 

Jeremy Hunt may be laying policy foundations for future governments to build upon

This government needs to be active in pursuit of growth. In light of this, it is good to see the Treasury in the driving seat, pushing at growth ideas rather than merely critiquing the policies borne elsewhere in Whitehall. Failing to bring the Treasury on board is the most common cause-of-death for industrial policy down the ages.

Jeremy Hunt’s biggest problem is time. On Friday he aptly quoted Bill Gates – “people overestimate what they can do in one year and underestimate what they can do in ten”. Unfortunately for this chancellor, he has probably  just over a year, and business is already looking towards Labour for the longer term. But with his financially responsible approach, and a focus on the evidence, he may be laying down policy foundations that the next government, whatever it may be, can build upon. That is not a bad way to start.