At a conference recently, I suggested that we should all have a stretch target in mind in terms of the UK economy. I said then that I saw no reason why the UK should not have the world’s third most powerful economy within ten years, if we maximise our trade and domestic regulatory policy.
As he delivered the Budget, Chancellor Rishi Sunak looked like he had been delivering budgets for years, not the few short weeks he had to prepare for such a momentous budget. It is was a big, bold budget, fit for a time of crisis – in many ways a war-time budget, except the war was not the UK leaving the EU, but a war against an enemy more insidious than any one country could summon up.
Both the above interventions are based on the mutual desire to see a UK that is thriving and prosperous, and one that works best for all its people.
But there is a difficulty in how this can be measured. And measurement is critical because, as it is often said, you get more of what you measure. Our current yardstick, GDP falls short on a number of grounds. I can illustrate this by looking at two fictional countries, A and B, with two different economic approaches and compare them.
First, growth does not equate to government spending. In the last few decades, a fiction has been allowed to take root in the national consciousness that one can either have fiscal austerity or growth, and that growth is derived from government spending. Under this logic, if you want more growth you will have to raise taxes – the opposite of what actually happens. GDP equally weights consumer spending and government spending. Suppose country A adopts policies that lower the cost of living (through improving the regulatory environment or lowering taxes) and puts more money into the pockets of its consumers who spend and save more as a result, and country B embarks on a programme of government spending, GDP would not distinguish between the two. Yet country A’s policies are more likely to lead to prosperity for all.
Second, growth does not come from government investment alone. GDP again equally weights government investment and private investment. Suppose our fictional country A adopts policies that incentivise private investment by having an open and competitive regulatory environment, and country B does not do this, but instead relies on government investment fuelled by government borrowing, then GDP measures will again not distinguish between the two. But it is increased private investment that spurs permanent job creation, innovation and the development of new technologies and new business formation.
Third, growth does not only come from nor is it reflected in trade surpluses. The GDP metric currently includes a net exports component that treats a country with large exports and imports the same as a country with minimal exports and minimal imports, as long as the net exports number was the same. An unproductive country sheltered behind high trade barriers would look the same as a vibrant node of the world’s supply chain, exporting and importing large amounts.
Fourth, productivity is not just about work intensity (i.e. productivity per hour) which is how it is currently measured. This neglects the crucial work duration part of the productivity equation, and countries differ enormously in their work duration numbers. The work duration of the average American worker is more than double the average French worker by way of example. This is to disincentivise countries where workers work long hours, precisely what is needed to increase output. It is all very well to retire people early and have such prodigious labour protections that people are barred from working for more than a certain number of hours per week, but that means that output will be diminished, and it is overall output we should be concerned about.
Government spending and investment have profound effects on private spending and private investment. If the government interventions are too great, they crowd out private sector investment, and stall new business formation. Governments should be as limited as possible in their interventions in the economy, even with respect to major infrastructure projects and see if there are alternative ways of securing private sector activity. This is not to say government has no role in major infrastructure projects, but the dynamic where governments provide the funding and firms feed off the government trough is not the only way to stimulate activity. Project finance arrangements, use of tolls and user fees to incentivise private activity should also be considered.
The UK government should also be very careful not to distort its market in ways that damage competition. This is rapidly becoming a new fault-line in the conservative party. Market distortions destroy wealth from the economy and make us all poorer. For the poorest among us, the harm is the greatest. It was therefore disturbing to hear that the Government intends to retain the Digital Services Tax which is both a trade restriction, impacting primarily US firms, but is also bad for a country that is seeking to become a high tech and innovation hub. The Net Zero by 2050 target now written into law will necessitate many of these market distortions which will have significant consumer welfare costs.
In a time of crisis, there is a great temptation to react to the crisis with a series of government interventions. But a crisis is precisely the time to look carefully at the underlying structural issues in an economy and focus on a pro-competitive regulatory environment which is open to trade, and protective of property rights. The Chancellor, in his speech did not mention the regulatory review that Treasury is embarked on. But there is potentially more private economic activity which could be unleashed from this review, provided it is comprehensive and does not just focus on business compliance costs, but on trade and competition effects also, than in any other measure he did announce.
In separating macro and micro-economic policy, we sometimes forget that often micro-policies done right can drive the macro picture. But to forget this is to leave ourselves only able to react to global events, instead of being in charge of our own destiny. The UK is building a boat to launch on the high seas. We must make sure it is seaworthy before it faces the storms and tempests of life.
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